Money Pilot Financial Advisor Podcast: Recent Episodes
Kathleen "Katie" Cannon
Cyber criminals have many motives and goals, but separating you from your hard earned cash is one of the most lucrative for the criminals and potentially devastating for you. I've put a checklist on my website at https://www.moneypilotadvisor.com you can download for free with more details and tips.
Do you use the same password to log into multiple websites? Or use common phrases or personal information in your passwords? If someone gets your login for one account they may be able to log into other important accounts, like your bank account or investment accounts. I know it’s a pain to have all those t passwords with random letters, numbers, symbols. Try using a password manager that can generate and save unique passwords for you. If your device has biometric authentication, use it to unlock our devices and to access stored passwords. And whenever possible used two factor identification. That's when the company you're trying to login to sends you a text or an email to verify it's actually you logging in.
Do you sharealot of personal information on social media sites? Some cyber criminals look on these sites for key information like your birth date, place of birth, or mothers maiden name which can aid them in resetting passwords associated with your financial accounts giving them access and locking you out. Consider making your social media account private where possible or hiding sensitive personal information.
Are images in emails you receive set by default to download to your computer automatically? This is one way cyber criminals lure you into clicking links or opening attachments which are then redirected to a compromised website. When you receive an unsolicited email don't open any attachments until you can confirm who the sender really is.
Research the apps before you install them on your phone. And give them the minimal permission necessary to use your data. Cyber criminals can build legitimate looking apps that can steal your data and monitor your phones actions.
Always remember if someone calls claiming to be from a government agency either offering you relief payments or demanding payments for fines or taxes, this is a scam. The IRS for example will never call or email you. Any official communication they will send you through snail mail. The same goes for someone claiming you won sweepstakes. Or someone calling from the “credit card department” asking you for your credit card information .
A common thread is the thieves will contact you by email, phone, or text, pressure you with immediate deadlines or threats, and try to get you to send them money, gift cards, credit card information, or a check. Or work to get key personal information from you like account numbers, passwords, to steal your identity and rob you through impersonation. Hang up, don’t text back, and don’t open the email. Call the company or agency directly using a phone number you know is correct to see if they are legitimately trying to contact you.
If your data is stolen, consider freezing your credit immediately by contacting the three major major credit bureaus, Experian, Equifax, and Trans Union. Change your password on any sites that have the same credentials. Report fraud immediately to your financial institutions . If you lost money in a scam or victim of identity theft file a report with your local police and the Federal Trade Commission. Check you credit report details regularly. By law you can receive a free copy from each of the three credit agencies once a year at https://www.annualcreditreport.com/index.action
Don’t wait to find out our a victim of fraud until you get denied for a mortgage, car loan, or line of credit, or worse flagged on your security clearance investigation.
This week I'm speaking at Military Money Conference near Raleigh, NC. It's the biggest gathering of the military and money community ever. If you've ever thought about a career in the personal finance field, this conference is for you. Attendees can expect inspiration and actionable advice and connecting within the personal finance community. Here's all the information https://milmoneycon.com/register/
Today I'll talk about some of the different career options related to personal finance. First, personal financial planning and Certified Financial Planner (CFP) designation. https://www.cfp.net/why-cfp-certification/why-get-certified CFP’s meet with clients to explore what’s important to them and create holistic financial plans to meet their unique financial dreams and challenges. CFPs provide advice in a wide range of specialties, like budgeting, planning for transitions, paying for college and retirement, managing risk, taxes, investing, and what ifs like disability or premature death. If you enjoy helping people in a very comprehensive way, this path may be for you. Learn more at The Military Financial Advisors Association (MFAA) which is a nonprofit of independent financial planning experts that specialize in military and veteran families. And we're on a mission to help service members, spouses, and veterans get started in the profession. Check out and the Military to Financial Planner podcast
Learn more at the Financial Planning Association (FPA). If you’d like real taste sign up for the FPA Externship https://fpaexternship.org which this year June - July. You get to peek behind the curtain and see over 25 firms and experts at work, and do the work yourself. No experience necessary and all are welcome. It’s totally virtual and if you miss a session live, it’s recorded. If you are interested in helping people in their financial lives but don’t know what that even looks like this will be the best $250 you’ve ever spent.
If you like educating and counseling check out the Association for Financial Counseling & Planning Education® (AFCPE®) It believes in empowering all people to achieve lasting financial well-being through the highest standards of financial counseling, coaching, and education. Their Accredited Financial Counselor (AFC) designation delves into financial issues relevant for lower and middle-class Americans, like managing credit cards and debt, budgeting, and managing cash flows. For military spouses, this can be a great way to enter the personal finance field, find volunteer and PAID opportunities. AFCPE also offers special pricing for military spouses.
Like people, but love numbers and rules? You might excel as a tax preparer and become an Enrolled Agent (EA). An enrolled agent is a person who can represent taxpayers before the IRS after passing a test covering individual and business tax returns. You could start your own tax return preparation service or work for another preparer. There's volunteer work like the IRS Volunteer Income Tax Assistant (VITA) Program provides free income tax preparation for servicemembers and lower income Americans. There's paid work with commercial tax preparation companies like H&R Block which also provide entry level training, often for free.
If you have questions and would like to know more, don’t hesitate to reach out. This field is really breaking open opportunities for new faces in different places. Come join the party.
You may have heard that the Thrift Savings Plan (TSP) may finally be joining us in the 2st century. There are some good and important changes coming, and there's going to be a transition period when you won’t be able to access to your TSP.
According to TSP, it is launching its official mobile app that will give you access to your TSP My Account. You'll be able to log onto your account using biometric identification software on your mobile device, like fingerprint access and facial recognition which will add an extra level of security. They are also promising virtual assistance via the mobile app or the web. There will be an interactive virtual assistant and automated support 24 hours a day. The virtual assistant can transfer you to an in-person representative during business hours, if needed. TSP is also promising an online chat function to connect you directly to a real representative for personalized support during business hours.
New streamlined paperwork processing is also coming, promising the ability to complete many transactions online with an "Easy, secure, and legally binding e-signature.” In particular, they're promising assistance and a streamlined processing for rollovers from other 401(k)s or IRAs into TSP. And you should be able to make electronic transfers for loan payments and payoffs, and disbursements from your account.
Here's the key dates they need to know:
April 8 – Last day to request paper loan documents by telephone
- April 21 – Last day to submit paper loan documents
- April 29 – Last day to request all other paper forms, whether by phone or online.
- Mayy 16 – Last day to submit or access all forms (online or hard copy). This includes withdrawal, rollover or transfer requests as well as beneficiary changes..
- So basically if you want to make any request that needs a form you must submit it by May 16.
- May 16 is also the last day to contact TSP via email
- May 26 – Last day to make transfers between different mixes of investments or change contributions. So if you want to rebalance, do it before May 26th.
- May 26th is also the last day you can contact TSP via telephone.
- From May 26 at noon Eastern time through the first week of June, account access of any kind will NOT be available. All your investments in TSP will still be there, your automatic payroll contributions will continue, and invested funds will continue to reflect market changes.
Think of this May 26th through the first week of June as a total eclipse of the TSP. Seeing the world go dark in a total eclipse of the sun can be scary. But have faith the sun is still there and will come out again from behind the moon. In the same way TSP will “go dark” from May 26 through the first week of June. But what comes out on the other side should be a much improved, more participant-friendly TSP.
Now after the upgrade, all TSP users will have to update your login information before accessing your online account for the first time. TSP is promising step-by-step prompts to walk you through it. You’ll verify your identity, update your contact information and set up your account security.
Coming later this year, but not with this upgrade TSP plans to add a window within TSP where you could purchase outside mutual funds through the TSP website. I'm keeping an eye on this as well and will certainly do a podcast on that as details become available.
For more information watch your emails or go to tsp.gov and click on the banner right at the top of the page New features and other changes coming to TSP later this year.” Can I put a link to that in the show notes
https://www.tsp.gov/new-tsp-features/key-transition-dates/
There are two types of 529 plans: prepaid tuition plans and education savings plans. Today I'm only focusing on the 529 Education Savings Plan which is an investment account you use to save for future education tuition and expenses. The plans are set up by each state. You to invest your savings in the plan, where your investment grows tax-free. And when you withdraw the money for approved education expenses, that distribution is also tax-free.
You can use it to pay for higher education tuition, mandatory expenses, room and board at any college or university, and some vocational schools. Now 529 accounts can also be used for up to $10,000 a year of K-12 school tuition only.
If you pay state income tax, you may get a break for your 520 contributions, including deductions on your state income tax or getting matching grants. You'll only be eligible for these state specific benefits if you invest in a 529 plan sponsored by your state of residence. It’s important to note that you can participate in ANY state’s 529 plan. Look at the plan’s administrative fees and investment fees. If you don’t pay state income tax, like many active duty military, you may be best off going with a plan with lower fees, better customer service, and/or investment options that best fit your needs. Details are on each plan’s website. There are also websites you can use to compare different states plans. A great place to start is Morningstar’s 529 plan ratings. https://www.morningstar.com/articles/1006084/the-top-529-college-savings-plans-of-2020
Anyone can open a 529 account for a designated beneficiary, family, friends and even the designated beneficiary themself. Anyone can contribute to the 529 plan once it’s open. Many plans also make it simple for others to gift money to the 529 account, like providing a donation link unique.
You typically choose from a range of investment portfolio options that often include mutual funds or exchange traded fund. Many also include age-based portfolios, which automatically shift from more aggressive investments to more conservative investments as a beneficiary gets closer to college age. Give these a look if you’d like to fire and forget.
529 accounts owned by a parent or dependent student are count as parental assets toward your expected family contribution. Higher expected family contribution can mean lower financial aid. Parental assets are counted to a max of 5.64% which is more favorable than student assets which are counted at 20%. So accounts owned by parents or the student may decrease financial aid. But not as much as if the student had the savings outside of a 529 account.
Assets held in 529 plans owned by grandparents or anyone else have no affect on the FAFSA. But when funds are distributed to pay for college expenses, it will be counted as student income on the FAFSA. One strategy to avoid this problem is wait to withdraw funds until after the student’s third semester of college, since the FAFSA looks at income from two years prior.
The owner that opened the account can change the beneficiary at anytime. There is a long list of people you can make a new beneficiary, including nearly any relative of the beneficiary. And you can change the beneficiary more than once. Check with your plan to see who qualifies.
If you withdraw money from a 529 plan that is not used for qualified education expenses it may be subject to both state and federal income tax and an additional 10% early distribution penalty. There are a few exceptions to the penalty if the beneficiary dies or becomes disabled.
One last note for parents. Remember, you can borrow money for college, but you can’t borrow for retirement. At a bare minimum invest enough in your TSP or 401k to get any match.
Most of you already know that digital assets like Bitcoin, Etherium, and Nonfungible Tokens (NFT) experience huge price swings or volatility. Today's focus is diversification of your portfolio and digital assets. When you choose from among different investment options, you diversify. You likely already started do this by investing in mutual funds or exchange traded funds through a workplace retirement plan like the Thrift Savings Plan or a 401k. If you have a portfolio of stock and maybe bond funds, what happens if you add in VERY volatile digital assets in the hopes of earning a bigger return (profit)? Will those stormy seas will turn into a tsunami of risky volatility?
Not necessarily. That’s due to correlation, the tendency of different investments to swing up and down together. Two investments with a correlation of 1, are perfectly correlated, they go up and down together. If the value of investment A goes up, investment B also always goes up. If the value of investment B goes down, investment A goes down too. This could be the stormy seas turned tsunami scenario. If you need that invested money for something else, you’re going to take a loss.
If two investments have a correlation of -1, they are perfectly negatively correlated, when one investment goes up the other always goes down. And vice versa. But just like unicorns, perfect negative correlation pretty much never occurs. it they have a correlation of 0, there is no correlation. If A goes up, B has an equal chance of going up, going down, or not changing at all.
The volatility, or price swings of digital assets is VERY high. Fortunately digital assets are NOT perfectly correlated to stocks, or any other assets. In plain English, most of the time digital assets values do their own thing and fluctuate in ways that do not match stocks or bonds.
Although Bitcoin is almost a decade old and many investors have jumped on the digital asset band wagon, the digital asset market is still more like the wild west than traditional investments. In addition to wild price swings, regulations and insurance programs that help protect investors of traditional assets haven’t developed yet for digital assets. Fees associate with buying, trading, and holding digital assets can be high and are often buried in fine print. If you do invest in digital assets, you literally need to be prepared for the possibility you could lose your entire investment.
Because digital asset prices are not strongly correlated to other assets like stocks and bonds they could be beneficial to broader portfolio. But be careful. Adding too much digital assets to a portfolio can have the affect of the tail wagging the dog. How much? Depending on your tolerance for risk probably just 1% to 5% of your overall portfolio. Yes, that small an amount could make a meaningful difference in your portfolio’s return, while managing the risk of price volatility and the very real uncertainty of the new investment type over all.
Always keep very detailed trading records. You are responsible for reporting and paying taxes on your profits and losses. If you’re a HODLer that buys and never sells, you won’t owe taxes until you eventually do trade or sell your assets. If you are an active trader, be very careful. You can wrack up a huge tax bill before you realize it if your unfamiliar with the tax laws, especially around short term capital gains, short term capital losses, and the wash rule. One way to minimize these problems is not to sell an asset within one year of buying it. If you plan to trade more often, seriously get some tax help.
For more information on investing, check out Ep 63 Crypto Currency, Ep 57 Risk Profile, Ep 52 Stocks, Ep 45 Rebalance, and Ep 44 Capital Gains.
I've put a small, tax season gift for you on my website moneypilotadvisor.com. You can go there and download a free checklist “What Should I Consider When Reviewing My 2021 tax return”. This information also should help you prepare your return.
If you take the standard deduction and made cash contributions to qualifying charities you can deduct up to $300 if you single or $600 for married filing jointly. A deduction reduces the amount of income we have to pay tax on. Be sure to have your donation receipts.
If you recently married or divorced, review your filing status which is determined by your situation on December 31, 2021. If you married any time last year, you'd be considered married for the entire year. The same as true if you had a child born in 2021. You would qualify for the child tax credit for the entire year.
If have dependent children under age 18 you may qualify for the child tax credit. In 2021, half this tax credit should have been paid to you directly in monthly payments beginning in July. As long as you still qualify, you’re eligible to get the rest of the credit when you file your tax return. But you need to report the total amount you have already received You can find this information in a letter the IRS sent to you, or from you online IRS account, or even reviewing you own bank records.
If you paid child care expenses for a dependent child under 13 so you and your spouse (if you're married) could work or pursue work, you can also qualify for the Child and Dependent Care tax credit. If you have dependent children or your spouse in college you may qualify for the Lifetime Learning Credit or the American Opportunity Tax credit. There are quite a few rules associated with all these tax credits. So be prepared to answer questions about your family situation in detail and bring receipts when you talk with your tax preparer or use tax preparation software to do it yourself.
Did you receive the third COVID Economic Impact Payment (EIP3) in spring 2021? It was $1,400 single, $2,800 for a married couple, PLUS $1,400 per dependent child or qualifying dependent relative. There was a phase out over certain income. If you enter the wrong amount you received on your tax return, it will go through a manual review at the IRS delay any refund for months. The IRS is supposed to mail out reminders this month or in March of the amount of EIP3. If you don’t have the IRS letter, go back and look over your bank statements from spring 2021 to find it.
If you find you owe more tax or get a higher refund this year than you expected consider changing your W-4 withholding through HR or military MyPay to adjust it.
Watch out for 1099 forms you should receive which report your investment capital gains, dividends, interest, and other income. You may need to log into your accounts and download them yourself. The key is to make sure you’ve rounded them all up and have them on hand.
One thing catching people off guard is reporting their income, gains and losses from trading, staking, interest, or rewards in crypto or digital assets. These are treated like other investments for taxation. It is critical to detailed records of all your transactions, even if you use a broker like Coinbase or Venmo. The 1099s they issue may have partial or inaccurate information. If you’ve been an active trader, I highly recommend you use a CPA knowledgable in crypto to help you with your taxes and make sure your record keeping is up to snuff.
Hello and welcome back to the podcast. I was listening to something this week about Maslow's hierarchy of needs. You may remember this from school or reading. It’s basically a pyramid where one need has to be met before you are motivated and are able to address the next level up the pyramid. The most basic needs, at the bottom of the pyramid are physical like shelter and food. Then the next higher is safety and security. Above that is love and belonging, then the next up is esteem and respect. Then at the very top of the pyramid is self-actualization the need to realize your potential and grow. The basic idea was that if you haven't the needs at the bottom of the pyramid you don’t have the capacity to address the needs higher up.
I was interested to hear recently that Maslow didn't actually come up with the pyramid, but that it was an idea was based on his writings. And since then still also reimagined this idea of a pyramid. And one that I liked and thought was especially fitting for financial planning is envisioning these needs as a sailboat rather than a pyramid.
In the sailboat version, life as a voyage on a vast ocean full of opportunities for meaning and discovery, but also danger and uncertainty. In order to stay afloat and keep from drowning you need a boat. A boat without a sail will keep you out of the water but you’re not going anywhere. You’re just bobbing along where the ocean takes you. The hull of the boat represents safety and security. The sail represents growth with the needs of exploration, love, and purpose. Exploration is the desire to seek out and make sense of new, challenging, and unpredictable events despite the pressure that comes with it. Love basically means the desire to feel connected and love with others. Purpose represents the continual pursuit of goals.
I really love about this idea of the sailboat with the hull providing all the safety, security and basic needs and the sail providing the things that really bring personal meaning to our lives. You can survive working and saving solely to build the boat’s hull. Yes the security the boat’s hull provides is critical. It doesn’t matter much much how you feel about love, exploring, and purpose if you boat is sinking and your surrounded by sharks. On the other hand, spending all your energy only focusing on that physical security, safe but adrift at sea isn’t much of a life either.
That’s why I love approaching financial planning as a sail boat. Absolutely, we need to make sure your money keeps you and your family alive, safe, and cared for at every stage of life. That’s essentially a life raft. But how much better is it to plan and build a sail boat? Where do you want your sail to take you? Your exploration, love, and purpose should guide your journey and be the blue print for the ship you build. That’s the part of financial planning I love. Listening and teasing out what kind of life journey you want. What are your needs for exploration, love, and purpose in your life? We’ll definitely make sure you have a safe and secure boat. But let’s get past just the lifeboat and help you use what you have to build the sailboat and navigate the life you want.
I hope todays’s podcast has helped you look past just the dollars and spreadsheets of building your best life you. And helped you think about your sailboat and the journey you want it to take you on.
I’ve had clients close to retirement to asking, “Should I pay off my mortgage before I retire?” The bottom line up front is that in the long run, dollar for dollar its very likely you would much better keeping a low interest mortgage and investing that cash in a moderate risk portfolio. But YOUR decision to keep or pay off your mortgage depends on a lot more than just a spreadsheet.
First do you have the cash available to pay off your mortgage or some extra income now that you can use to make extra payments and pay it off sooner? Why are you considering paying it off early? Will it help you sleep at night? Honestly, if having a mortgage payment in retirement will have you living in fear of losing your home, it doesn’t really matter what the numbers say or what opportunities you leave on the table.
Other benefits of paying it off are you won’t have to pay interest on a loan you don’t have. No mortgage can improve your cash flow with lower fixed costs each month. This can be a big help if your circumstances change.
And keeping your mortgage? First, you’ll need to have income coming in to make a mortgage payment along with your other expenses. If you can, you may end up much better off if you don’t pay that mortgage off now. And instead invest that money, and enjoy years of compounding growth. Especially if you financed or can refinance at these historically low home mortgage interest rates.
Let's say you have a mortgage with a 3% interest rate, balance right now of $200,000, and 15 years of payments left. Or refinance to a 15 year mortgage at 3%. Over 15 years, you would pay just over $48,000 in interest. Pay off now and you save $48,000.
Now instead of pay off the mortgage, you invest that $200,000 in a fairly conservative, diversified investment portfolio of half stocks and half bonds. Historically, this will earn you a return of at least 6%. That $200,000 invested for 15 years with a 6% annual return will grow to just over $490,000. That’s a profit of $290,000. Now you still had to pay $48,000 of mortgage interest. Which still leaves you more than $250,000 better off by keeping your mortgage and investing!
I mentioned your decision is about more than just a spreadsheet. Paying off your mortgage is a sure thing. That $200,00 disappears form you bank account and you own your home free and clear, period. If you keep your mortgage, with a fixed interest rate that interest cost is a sure thing. BUT, that investment return is not guaranteed.
For keeping your mortgage to be a better option for you, your overall return on your investments needs to be higher than your mortgage interest rate over the life of your loan. Even with conservative investment portfolio there is a very good chance that keeping your mortgage with a low interest rate is better choice, but there is no guarantee. Again, this is where having a reliable cash flow in retirement and emergency fund are key.
In the end it comes down to what options are available to you and how you tolerate uncertainty. Let’s do a quick review. If you are comfortable with some uncertainty, you will have reliable income to pay your expenses in retirement, including a mortgage payment, and you can lock in a mortgage interest rate that is lower than the profit you can expect from investing, keeping that mortgage could be a very good choice for you and leave you with a higher net worth.
If you don’t think you’ll have the income to cover all your retirement expenses and a mortgage, or you won’t sleep at night with a mortgage payment having over you head, no matter what the numbers say, your best choice will probably be to go with the sure thing and pay it off.
And if you still have a mortgage over 3% your window for getting a lower rate is is probably closing. For more info on the refinance decision go back to Episode 18.
When you separate from military or federal employee service without a retirement or a family member leaves a current job, you lose your healthcare associated that employment.
For active duty military and reservists covered under Tricare if you separate without a retirement you qualify for the Continued Health Care Benefit Program (CHCBP). The deductibles and cost shares are relatively low, but premium for individual coverage about $6,000 a year. For a family it’s a little over $16,000 a year. https://www.humanamilitary.com/beneficiary/benefit-guidance/special-programs/chcbp/
If you are a separating federal civilian employee, you can qualify for Temporary Continuation Coverage (TCC) which is a continuation of your existing FEHB policy. But you must pay the full premium for the plan you select, both your and the government's shares of the premium. So you can expect TCC to be about 4x as expensive . https://www.opm.gov/healthcare-insurance/healthcare/temporary-continuation-of-coverage/#url=separate
COBRA coverage is available for regular civilian employees of companies with 20 or more employees. COBRA is a federal law that gives you the right to keep their employer’s group health plan after a job loss. You will have to pay the full health insurance premium, including the employer portion. Check with HR for details.
F
or all three of the current employer continuation plans temporary the service member or employee can get 18 months of coverage, eligible family members 36 months.
There are other options on the Health Care Exchange at https://www.healthcare.gov/ You'll see plans, costs, and possible premium tax credits that can greatly reduce your overall costs, Click the search box at the top of the website and enter Preview Plans. You’ll need to enter some basic info like your state and anticipated income for the year you want coverage for details. Your costs will depend on your income relative to the federal poverty level. If you qualify for the premium tax credit subsidies. You can have this credit applied to reduce your monthly healthcare.gov insurance premiums. Or you can wait to you file your tax return at the end of the year and apply it to the federal income tax you owe for the year.
If your income is below 138% of the federal poverty level, you may be eligible for Medicaid and /or Children’s Health Insurance Program (CHIP). But these are state based, whichcan be challenging if don’t know where you will be settling. If you qualify for Medicaid, but choose to buy health insurance on the exchange anyway, you are NOT eligible for for a premium tax credit.
For 2022, if you earn more than 400% of the poverty level the premium tax credit begins to phase out. In 2023 it will revert to being a cliff. One dollar past 400% and you get no subsidy.
You need to enroll in a particular Silver plan or better to receive the premium tax credit. Your costs are based on your expected household income for the year you want coverage. If your income doesn't match your estimate for the year it will be reconciled when you file your federal income taxes. For your household size count yourself, your spouse if you're married, plus everyone you'll claim as a tax dependent, including those who don’t need coverage.
You can also shop around with different health insurance companies or brokers. If you will earn too much for an exchange premium credit, you may find a cheaper alternative directly from an insurance company.
Today we’re talking about combat pay and the Thrift Savings Plan (TSP). I’ll be throwing around some tax terms terms, so let me take a minute to go over them.
Tax-exempt - You don’t pay any state or federal income taxes on tax-exempt pay, ever. This applies to all of the pay our enlisted and warrant officers earn in a combat zone. For commissioned officers combat pay is tax-exempt up to $107,868 for 2022, your pay above that is taxed as normal.
Pre-tax, also called tax-deferred - Contributions to Traditional TSP are pre-tax or tax deferred. Your TSP contribution is pulled from your pay first, then you pay income tax on what’s left. You DO you pay income taxes later on both contributions and on the amount your it grows when withdraw it from TSP.
After-tax - Contributions to ROTH TSP or a ROTH IRA are called post-tax, or after-tax contributions. You pay income tax on your pay first, then make contributions to ROTH accounts with what’s left. So you pay tax on all your taxable your income now. But, when you withdraw it after after age 60, your initial contributions and all the growth comes out tax free.
So let’s envision a chart about combat pay contributions to retirement accounts like Traditional TSP, ROTH TSP, and ROTH IRAs. Our chart has four columns. The 1st column lists the type of contribution, the 2nd column asks “Are my contributions taxed when earned?”, 3rd column “Are contributions taxed when withdrawn?", and 4th “Is the growth taxed when withdrawn?” No-one loves to pay taxes, so we’re looking for no answers to these tax questions.
Non-combat pay, Traditional TSP contributions - No, Yes, Yes
Non-combat pay, ROTH TSP or IRA contributions - Yes, No, No
Tax-exempt Combat pay, Traditional TSP contributions - No, No, Yes
Tax-exempt Combat pay, ROTH TSP or IRA contributions - No, No,No, This is the Triple Crown of No Taxes.
Military members deployed to a combat zone can contribute more than the normal $20,500 to their TSP, all the way up to $61,000 in 2022. The details are important. Last week we went over TSP contributions by the numbers. So if you missed it go back to Episode 76 Change TSP Contributions for all the details.
I’m going to boil down all the info from last week and this week into a strategy to get the biggest bang for your compbat pay contributions. First, make sure you have enough cash for an emergency fund, you don’t have high interest debt like credit cards. Go over your cash flow or budget and see how much you can afford contribute while you’re deployed. This money will be locked up for a long time, so don’t over extend yourself.
Alright, here’s my recommendation for your combat pay contributions.
First, contribute up to $20,500 limit into your Roth TSP or up to $27,000 if you will be 50 or older this year.
If you want to save more, next contribute up to $6,000 into a Roth IRA. Or $7,000 if 50 or older. You could also contribute to a ROTH IRA for a non-working spouse.
Want to save even more? Contribute up to another $40,500 of your tax-exempt combat pay into your Traditional TSP, $34,000 if 50 or older.
And once again, for more information on contributing to these accounts, head back to Episode 28 Meet ROTH, Episode 29 ROTH IRA, and Episode 30 To ROTH or Not to ROTH, and last week’s Episode 76 Change TSP Contributions.
When changing your Thrift Savings Plan (TSP) contributions. three dollar limits that apply The annual limit is $20,500. This limit is to the combined total that you can contribute in 2022 to your Traditional and Roth TSP combined. This limit does not apply to Traditional TSP contributions made from combat pay. The next limit is $6,500 on additional catchup contributions for those turning age 50 or older in 2022. So if that's you, can make total TSP contributions of up to $27,000. For military in a combat zone, your contributions toward the catch-up limit must be Roth. And you can't contribute toward the catch-up limit from incentive pay, special pay, or bonus pay.
The third limit is the $61,000 Annual Addition. Its the total amount of all the contributions that can be made to your TSP a year. This limit is includes your employee contributions and for you BRS military and FERS civilians the Automatic 1% Contributions, and up to 4% Matching Contributions. It doesn't include catch-up contributions. The annual addition limit affects mostly our military service members who can contribute tax-exempt pay earned in a combat zone up to this limit.
Next decide how much your can and want to contribute. Remember with ROTH TSP, you pay your income taxes now, up front on your contributions. So you will have less money paycheck each pay period when you contribute to ROTH TSP than if you contribute to Traditional TSP. YFor more info listen to Episode 28 Meet ROTH and Episode 30 To ROTH or Not to ROTH.
Civilian employees usually designate a dollar amount to contribute from each paycheck, while our service members will need to elect a percentage. FERS civilians and BRS military, in order to get your full match, you need must contribute at least 5% of your pay in every single pay period to get your full match. If you hit one of those limits before the end of the year, you give up that match from your pay for the rest of the year. Check out their online Elective Deferral Calculator . You’ll need your most recent LES and guess how many pay periods it will take your personnel center to make the change to your pay. For Military and DoD civilians, MyPay says, it will be effective at the beginning of the next pay period. So enter 0 for this box.
The calculator will give you the new amount you can contribute each remaining pay period if you want to maximize your contributions for 2022. Pick what you can afford, or that max number from the website, whichever is lower for your contribution.
Next use your electronic payroll system to change your TSP contributions. For military service members and DoD civilians thats myPay. For other for federal employees there are other payroll systems, like Employee Express, EBIS/GRB, LiteBlue, and NFC EPP.
Generally, feds will use enter the dollar amount and service members a percentage of your pay. Military can keep this simple by contributing from your base pay. Take the monthly TSP contribution you want to make, divided by your monthly base pay, times 100
Then go to myPay and log in. Under the “PAY CHANGES” heading, select the “Thrift Savings Plan (TSP)” link. Then click the yellow pencil icon to make a change to your TSP contribution. Enter your changes in the pop-up window. Enter that percentage in the base pay box for either Traditional TSP or ROTH TSP or split between both. There’s boxes to enter percentages for other pays as well.
Then click Continue to review then Submit.
Merry Christmas and welcome back to the podcast. I hope yo’ve a had a bit of a break to spend time with the ones you love. Here’s a special shout out to our military and civil servants that are spending another holiday far from home and family. We love you and we’re thinking of you. Thanks for being there for us.
Today’s podcast is a short one. It’s a time for rest, fun, and joy. So believe it or not today’s podcast is on how our military service members can change their income tax withholding and change your Servicemen's Group Life Insurance (SGLI).
Whaaat? REALLY? Why? Who wants to think about this at Christmas. Especially if you’ve been in awhile you know almost any personnel action you have to do that’s related to your pay is a pain, can go bad fast, involves who knows what paperwork and chasing done the right person to hand it to.
So this Christmas, my gift to you is the ‘EASY” button for changing your SGLI and W4 withholding. It’s the Christmas miracle of military paperwork. If you are getting a big refund each year or a nasty tax surprise at filing time, you can instruct your employer to change your withholding amounts by filling out a new W4. I did an entire episode on the W4 Withholding form in Episode #40 Withholding. So refer back to that to see what information you need to update your withholding. And I’ll put a link in the show notes to the IRS Form W4 too. https://www.irs.gov/pub/irs-pdf/fw4.pdf
For our serving and retired military and DoD civilians it is, no kidding, easy. You log into your MyPay account at https://mypay.dfas.mil/#/. The information you input directly on the MyPay website is the same as the W-4 form. On MyPay look for the Pay Changes category and under that you can chose federal withholding or state withholding. Fill in the blanks online and its all done online in a few minutes.
The other Christmas miracle easy task is changing your SGLi. Our serving military now can make changes to your SGLI online using the the SGLI On-Line Enrollment System (SOES). Go to MilConnect (link again in show notes) https://milconnect.dmdc.osd.mil/milconnect/
On the MilConnect main home page you’ll find front and center a “I want to…” section and Manage my SGLI is an easy to see choice. Once you click that button, you’ll be prompted to sign in with your DS login, your CAC card, or your DFAS myPay credentials. Your choice. You’ll se a ‘If you have had a life event” choice. If you’ve gotten married since you joined the military, or divorced, had children, or a previous beneficiary has passed, now is a good time to relook how much coverage you have and who you have listed as beneficiaries. You can change your amount of coverage and beneficiaries all on-line, oh so easy.
And that’s it for today! If your end of year to-do list or New year’s resolution includes finally updating your income tax withholding or SGLI coverage. Hop on it. So quick and easy. A military Christmas miracle.
If you have cash savings that you will not need for at least a year, consider investing in US Government I Series Savings Bonds. Check out the Treasury Direct information page for Series I Savings Bonds: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm#irate The I Bonds you buy between now and April 22, 2022 will earn you at least 3 1/2 percent interest over 1 year. After that you should reevaluate and consider redeeming them if other cash savings rates are better.
The interest that the I Bonds pays has two parts. The first part is based on a bond interest rates when you purchase your bond . This interest is fixed for the life of the bonds which is 30 years, unless you sell it first. This fixed part rate for is now 0%.
Now the second part is a floating interest-rate. So you know that if you invest now, that the first part is gonna be 0%. But the second, floating rate is based on inflation and changes every six months in November and April. We had an inflation spike in 2021 . Because of that recent spike in inflation the floating rate for bonds purchased through April 2022 is 7.12% annualized. What this means is for those first six months you'll earn 3.56% on your bond which is half of the annualized rate. Then the floating rate will change for the second six months. The floating rate could also drop to zero if there is no inflation. But even if that happens you would still have a total of 3.56% return for one year.
You can buy up to $10,000 in electronic I Bonds now for calendar year 2021 and up to another $10,000 for calendar year 2022 after January 1st. The bonds are backed by the federal government and it guarantees you will get you money back, plus the interest. You will pay federal income tax on the interest when you redeem the bond, but they are exempt from state tax. You cannot redeem I Bonds in the first year. And if you redeem within 5 years of purchase, you will forfeit the last 3 months of interest earned. The unusual combination of recent high inflation and low general interest rates make the return on I Bonds you purchase between now and the end of April 2022 a pretty good deal compared to other places you can stash your cash.
If you are interested, you buy electronic I Bonds directly from the US Treasury online for amounts from $25-$10,000. You purchase these online directly from the Treasury at https://www.treasurydirect.gov/global_open.htm Each person can buy up to $10,000 in electronic I bonds each calendar year. To open an account you will need your drivers license, Social Security number, and bank routing and account numbers for the electronic transfer of funds and you can designate one beneficiary for your bond.
You can also buy I Bonds as a gift for someone else including minor children. That person would also have to have a treasury direct account. More information is here: https://www.treasurydirect.gov/indiv/planning/plan_gifts.htm
There are also paper I bonds they can only be purchased with a federal income tax refund. You can use up to $5000 of any refund on your federal taxes to purchase these paper Io bonds. More information at https://www.treasurydirect.gov/indiv/research/faq/faq_irstaxfeature.htm And this $5000 limit is in addition to the $10,000 a year electronic I Bond. You would need to file IRS form 8888 with your tax return to do that.
If you’d like more information on bonds in general, check out Episode 53 Bonds. And for an overview of paces to safely invest cash listen to Episode 39 Stash the Cash. Have a wonderful Christmas and we’ll talk again next week.
Today's content comes directly from Brian O'Neill’s recent blog post Top 10 TSP Quirks You Need to Know. Brian is a fellow Military Financial Advisor Association member , former Air Force fighter pilot, and Certified Financial Planner who writes a great weekly blog with a fighter pilot twist. Thanks, Brian.
If you’ve ever compared the Thrift Savings Plan (TSP) to a civilian 401(k), you probably noticed the TSP has quite a few quirks:
1. Minimum balance: As long as you leave at least $200 in your TSP when you seperate from service, you can keep your TSP account open. This is great because you never know when a change in employment or the tax law will make it advantageous to roll money into the TSP.
2. Accepts rollovers: Except for a Roth IRA dollars, you can roll a Traditional IRA, and most other employer plan (e.g., 401(k)) funds into the TSP. This can be great for simplifying your roster of retirement accounts.
3. Three Withdrawal options after separation:
Fixed or life-expectancy-based installment payments. For installments of less than 10 years, you can rollover the distributions to an IRA. Single withdrawal: The minimum is $1,000 and you can only do one every 30 days. Purchase an annuity. This locks in a fixed stream of payments for life, but you forfeit any right to leave the annuity balance to your heirs.
4. Roth or Traditional withdrawals: You can choose Roth, Traditional or pro-rata withdrawals. If you have contributions from a combat zone, your contribution is not taxable but the earnings are. Withdrawals from your Traditional balance will always be pro-rata from pre-tax and after-tax dollars.
5. Processing delays. Along with the military and civil service human resource bureaucracy delays, the TSP can be pretty slow processing any request. Plan ahead, it’s not an ATM.
6. Spouse rights. If you choose to receive your TSP as a separately-purchased annuity, your spouse will need to consent to anything other than a 50% survivorship feature.
7. Death Treatment: Your balance will go to your beneficiaries on file with TSP, and NOT according to your will. And you must use form TSP-3 to change the d default beneficiaries. A surviviing spouse's TSP account is automatically invested in an age-determined Lifecycle Fund. A non-spouse beneficiary can't keep the TSP account and will need to receive the funds in an Inherited IRA. If your beneficiary then dies, the TSP will pay the balance directly to that beneficiary’s beneficiary allot once, potentially creating a “tax bomb.” If you inherit a TSP account, roll it to an Inherited IRA so a successor beneficiary keeps the tax-advantaged status.
8. The G-Fund. The G-Fund invests in special government bonds that its guaranteed to never lose principal value. But the G-Fund is usually the lowest performer of the 5 core TSP funds. It can make sense as part of a portfolio, but usually is NOT all.
9. Withdrawals are pro-rata from all funds. You can’t take a distribution from only the G-Fund or C-Fund, for example. A withdrawal is pro-rata across all them. For a work around after your withdrawal comes out, log into TSP and rebalance your funds to the allocation you want to keep.
10. Roth RMDs. A Roth IRA does not have a Required Minimum Distribution (RMD). Traditional IRAs, 401(k)s, and the both Roth and Traditional TSP all require you to start taking RMD every year starting age 72. Evaluate moving of Roth TSP dollars into a Roth IRA prior to 72.
For you military and federal employees out there, TSP has a detailed notice that provides great info and includes a chart and explanation of how to calculate your RMD yourself. I’ll put a link in the show notes https://www.tsp.gov/publications/tsp-775.pdf
The simplest way to calculate an RMD is to go to investor.gov's online RMD calculator https://www.investor.gov/financial-tools-calculators/calculators/required-minimum-distribution-calculator
You need two key pieces of information. How old will you be on December 31st and what was the value of your Traditional TSP, 401k, and/or IRA at the end of last year. Hopefully, figuring out how old you will be at the end this year is pretty easy. To find the value of your account at the end of last year, pull up your end of year statement.
The main thing to remember about RMDs is that they are mandatory for Traditional IRAs, Traditional TSP, and Traditional 401k. RMDs now start at age 72 and must be taken every year. The dollar amounts are dictate by the IRS. RMDs are taxable income. And There is a very stiff penalty if you don’t take the full required distributions. So you lose a certain amount of control over how much and when those retirement savings are taxed. This may not be a big concern if those RMDs don’t push you into higher income tax bracket.
But if they will push you into a higher tax bracket, there are some strategies you can consider to minimize the tax impact. You could work past age 72, contribute to ROTH retirement accounts now instead of Traditional accounts, and do ROTH conversions is years you have lower income (like between stopping working and receiving social security or a pension). Just remember with ROTH accounts you must pay the income tax upfront for the benefit of tax-free withdrawal later. And don’t delay your very first RMD into the second year if that will push you into a higher tax bracket.
Also you can take your total RMDs for several IRAs from just one of the IRAs. But you can’t do that with other retirement accounts, like the TSP or 401k. And each spouse must take RMDs from their own retirement accounts, even if you file jointly.
Today I we're talking about real financial planning. It's not hard to find financial advice. You can read books, look on the Internet, rumors, ask that crazy uncle. But I'm talking about a professional that has your best interest at heart of everything they do. The Certified Financial Planner Board describes financial planning as “looking at a client's entire financial picture and advising them on how to achieve their short- and long-term financial goals. From saving for education and planning for retirement to effectively managing taxes and insurance, financial planners develop valuable relationships with their clients to provide them with confidence today and a more secure tomorrow.” A good financial planner takes in all your information, does the math heavy lifting for you, and then comes back with a plan on how to achieve you goals. This holistic approach is good financial planning, and will give you the "What and the How" to help you accomplish your stated goals. When you seek out financial advice, your should absolutely look for this as a minimum.
But you don’t have to settle for just “good”. A real financial planner takes the time to explore your “Who and your Why”. They listen to your story, your passions, your way of doing things, and your fears. Who and what is most important to you? Why? They explore with you the life you want and what keeps you awake at night. Everyone has a different relationship with money. And we don’t check that at the door when we head into a meeting to discuss our financial goals.
Personal financial planning is personal. A financial plan developed from an short interview or questionnaire and review of your documents may result in a clear, detailed road map to a great financial destination. But is that your destination? Is it the best journey for you? Do you see yourself really carrying out this plan? Did you planner explore options, what ifs, or possible other paths with you? It takes time and most of all it takes great listening. When you walk out of a meeting with your financial planner or advisor you want to be confident they know what they are doing and that they are bound to put your best interest first. But you also need to know you were really heard. That your financial plan isn’t just a good financial plan. It’s YOUR plan. It’s the best plan for you and you see yourself in it.
If you’ve been thinking about getting some financial advice, you have choices out there. Most good financial planners offer a free introductory call or meeting, which is your chance to see they they might be a good fit for you. Ideally, they ask some open questions and really listen. If it sounds like a sales pitch, it probably is. And you can shop around. There are planners that you can hire by the hour, or for a specific project. Others like me work with clients on an ongoing basis to answer questions along way and reorient as your life’s journey evolves. Many advisors expect to manage and invest your money for you. Others like working with do-it-yourselfers by providing advise you can carry out yourself. I do both.
But finding a real financial planner comes back to you. Do they hear you? Do they invest the time to explore your who and your why? Do they “get” you and do you see yourself in the advice and planning they give back. If not, move on. You deserve better and it’s out there for you.
Here's some links to help your search for a real financial planner. My website, the Military Financial Planner Association, XY Planning Network, and the National Association of Personal financial Advisors.
Today we’re looking at things you should consider before the end of this year. If you single and have less than $40,400 taxable income in 2021 or $80,800 if married filing jointly you’re in the 0% capital gains tax bracket. You have a capital gain when you sell an asset, like property, stocks, bonds or mutual funds, for more than you paid for it. So this may be an opportunity to sell assets that have grown in value, pay 0% taxes on that profit and reinvest into something else. For more info on the capital gains tax check out Episode 44.
If you saving for college in a 529 account, you may be eligible for State Income tax deductions or credits. Some sates will even add or match contributions for taxpayers with modest incomes. Check out your states 529 account website for rules and details.
If you haven't maxed out your 401k or TSP contributions this year there's still time to increase your savings. For 2021 the max is $19,500 a year or $26,000 if you are 50 or over. At least save enough to get your full match. For BRS military and FERS federal employees, that's at least 5% of you annual income.
If you are single with an Adjusted Gross Income less than $125,000 or Married Filing Jointly with under $198,000 of income, you can contribute earned income to a Roth IRA. And a non-working spouse can also contribute to a ROTH IRA as long as your working spouse has enough earned income. You contribute money to Roth IRA after you’ve paid tax on it. Then it grows tax-free. It's a great way to take advantage of being a low tax bracket now to save something, grow overtime, and be tax-free to you in retirement. You can contribute up to $6,000 a year to an IRA or $7000 a year if you’re 50 or older for this year through April 15, 2022.
If you will be in a higher income tax bracket when you retire, consider doing a Roth conversion. You take money from a traditional IRA, 401k, or TSP, pay income tax now on the withdrawal, and deposit it in a ROTH 401k or ROTH IRA. You cannot covert a traditional TSP into a ROTH TSP. You can convert a Traditional TSP into a ROTH IRA. Conversions must be completed within 60 days of making your withdrawal to avoid penalty. And It is best to use cash to pay the income tax on the conversion, instead of using retirement savings to keep your savings growing and avoid possible early withdrawal penalties. ROTH conversions can take a while, so if you want to do one for 2021, don't delay. To learn more about ROTH accounts listen to Episode 28 Meet Roth, Episode 29 Roth IRA, and Episode 30 To Roth or Not to RotH.
Did you get a raise or a bonus or your spouse start working this year? Did you owe federal income tax or get a big refund last tax season? Then take another look at your federal income tax withholding to make sure you don’t end up with a large tax bill or a refund at the end of next year. The IRS has a great online tool to help you determine how much withholding you should have and print out a new W-4 to your employer. https://apps.irs.gov/app/tax-withholding-estimator
If you do not itemize your taxes you are eligible for a tax deduction for cash charitable contributions you make this year of up to $300 if your single or $600 if MFJ. Save your receiptsand make the gift before the end of the year.
If you have a Flexible Savings Account you may be able to carry over unused benefits from this year into 2022. Check with your particular plan. Federal employee with a FSAFEDS account, can carry over all remaining funds into 2022. But you must re-enroll in the same account(s) during Open Season, Nov 8th to December 13th this year. If you fail to re-enroll, you forfeit all your unused funds. Note though, this benefit carryover only applies to Health Care FSAs. You cannot carry over any balance left in a 2021 Dependent Care FSA.
If you served on active duty in the military and then become a federal civilian employee, that military time may count as time in service for calculating your FERS or CSRS pension. Periods of active duty while in the any of the military reserves, including your annual active duty training, count. However, National Guard active duty only counts if it was Title 10, section 233(d), or under a call by the president. Service must be honorable. And a deposit has to be received before you retire (that’s the buyback).
You need to qualify for a FERS or CSRS pension, which generally means serving at least 5 years as a federal civilian. Then the military time you deposit, nicknamed buyback, is added to the years you actually work as a civilian when calculating your FERS or CSRS pension benefit.
The pension formula for a FERS employee is the average of your High 3 salaries times your creditable service times our multiplier. If you have 24 years of federal civilian service, a high-3 pay of $110,000, and will retire before age 62, your pension would be $110,000 x 24 years x 1%. That’s $26,400 a year. If your buy back 6 years of military time, that 30 years which is $33,000. That’s $6,600 more a year in your FERS pension. Live 30 years in retirement and that’s almost $200,000 more with the buyback. And buying back military time may give you enough creditable years you to retire earlier.
A buyback for a FERS employees is about 3% of your total military BASE pay for the years you are depositing. If you wait more than 3 years to buyback, you will also have to pay interest Even with the interest it is usually worthwhile to buy back the time.
The multiplier for CSRS employees is about 7%. But the rules for CSRS employees are more complicated. If you are a CSRS employee that will not be eligible for Social Security, no deposit, or buyback, is required and you will get full credit for military service after 1956.
If you’re a CSRS employee that will be eligible for Social Security, the military time you buy back will count towards eligibility for retirement and computation of your pension. If you don’t buyback any time, your military time will count towards eligibility for retirement. And if you retire before your eligible for Social Security at 62, your military time will count toward your pension computation just up until you reach 62.
If you have a regular military pension and buy back those years you will have to give up your military pension. This very rarely makes financial sense. But if you’re entitled to a reserve pension that starts at age 60 you can keep that, whether you buyback or not. This often does come out as a great deal.
You don’t need to do all the math your HR office will do the calculations for you. You will need a copy of your DD 214 the Report of Transfer or Discharge. If you can’t find it, you can request a copy it from the National Personnel Records Center by filling out a Standard Form 180.
Then complete a form RI 20-97 Estimated Earnings During Military Service and mail with a copy of your DD214 to your appropriate military finance center. They send back your statement of estimated earnings.
Take your estimate of earnings and your DD214 to HR and fill out an SF 2803 Application to Make Deposit or Redeposit. HR will then compute the amount of your military deposit using the Military Deposit Worksheet, let you know the amount, and options for making payments.
Once HR gives you the buyback cost, compare that to how much more your pension payments would be with the buyback. The process can be a pain, but it is usually well worth it. You can payoff all at once or in payments over time. And remember, your application to deposit, buyback, military time has to be approved and paid BEFORE you retire.
The Federal Benefits Open Season starts November 8 this year and goes through December 13. This is the opportunity for our federal employees out there to re-look your benefit choices and explore your options for 2022. During the annual open season, you can enroll in a Federal Employees Health Benefits (FEHB) Program and the Federal Employees Dental and Vision Insurance Program (FEDVIP) plan. You can also change plans, change plan options, you can change enrollment type between self, self plus one, or family coverage, or cancel your enrollment. Do nothing and your current coverage will automatically continue.
You also have choices to make with the Federal Flexible Spending Account Program (FSAFEDS). https://www.fsafeds.com With an HCFSA, you use pre-tax dollars to pay for qualified out-of-pocket health care expenses. The maximum amount you can allot to an HCFSA is $2,750 (per individual) a year and the minimum is $100. You declare your savings amount and set up the allotment during open season and the total amount you elect to save will be available on day one of 2022. Your fund contributions are withdrawn automatically from each paycheck and deposited into your FSA before taxes are deducted. You can only carry over $550 of a the Health Care FSA from one year to the next.
With the Dependent Care FSA (DCFSA). You can contribute up to $5,000 a year to pay for care for your child under age 13. It also covers care for your spouse or a relative who is incapable of self-care and lives in your home. Dependent Care FSA savings cannot be carried over to the next year at all. If you do nothing during open season your FSA election will NOT automatically continue. You must reenroll.
A High Deductible Health Plan (HDHP) combines a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA), medical coverage and a tax-advantaged way to save for future medical expense. With an HDHP, you must meet the entire annual deductible before plan benefits are paid for services other than in-network preventive care. Once you hit the catastrophic limit, the plan pays 100% of the allowable amount. Th insurer will set up an HSA for you and put a set amount of money in it. You can also put contribute to the account with pre tax dollars. Funds deposited in your HSA are not taxed, interest on the HSA grows tax free, and you can withdraw it tax free to pay qualified medical expenses. There are more rules, so be sure to read more on this before making a decision. I’ll put a link to a good OPM fact sheet on HSAs in the show notes. https://www.opm.gov/healthcare-insurance/fastfacts/high-deductible-health-plans.pdf
Don’t assume your plan is staying the same. Review your plan documents every Open Season for changes to and what new options may be available. Is there are newer plan choices that is a better buy. Read the plan brochures. Some FEHB plans offer basic dental and vision benefits or discount programs. You might be better off in a FEHB plan with some dental benefits than paying a separate FEDVIP premium.
If you require extensive medical treatment in the 2022 it may be worth paying higher premiums for a plan that covers more of your claims. If everyone is healthy, consider paying less for a plan with less coverage and putting the extra cash in savings, like an FSA or HSA.
OPM has a great online tool you can use to compare the various plans available and their costs for 2022. You can search for the plan options using your location or employee type, and you can review any changes to the plan you already have. https://www.opm.gov/healthcare-insurance/healthcare/plan-information/compare-plans/
The Department of Education recently announced some significant temporary changes to the Public Service Loan Forgiveness (PSLF) program called the Limited Waiver Program.
Who? Full time service members and federal employees are all eligible, as well as those of you working full time for state governments and most non-profits.
What is PSLF? It's a Loan Forgiveness program. If you work for a qualifying employer, have qualifying loans, work full-time, and make 120 on-time monthly loan payments, you can apply and have the remaining balance of your student loans forgiven.
Why? Why has there been a change to the program? As it turned out in practice, PSLF was mostly an unfulfilled promise. Many borrows misunderstood the requirements, were misled by loan servicing providers, or never even qualified in the first place. The recently announced changes to PSLF are supposed to help correct some of these problems and fulfill the PSLF promise.
What has changed? A key requirement for PSLF is that you must have federal Direct Loans to qualify. The Federal Family Education Loans, Federal Perkins Loans, and Graduate Plus Loans are not a federal Direct Loans and don’t qualify. Loan payments under those programs didn’t count toward forgiveness. To meet this requirement and qualify most borrowers consolidated those loans into a federal Direct Loan. If you didn't before, there’s good news. Now, any payments you made in the past in these federal student loan programs count toward your 120 payments, BUT only if you consolidate to a federal direct loan by Halloween 2022.
Don’t know what kind of federal loans you have? Log into your account on StudentAid.gov https://studentaid.gov/fsa-id/sign-in/landing , and go to the My Aid page StudentAid.gov/aid-summary/, then scroll down to the Loan Breakdown section. If you haven’t already, consolidate (DON’T refinance), consolidate into a federal Direct Loan . You’ve got one year. Details here https://studentaid.gov/app/launchConsolidation.action Once consolidated into a Direct Loan, your previous monthly payments made before October 31 this year, 2021, in those other federal loan programs will count toward PSLF retroactively.
Change #2. Past payments under any repayment plan now count toward loan forgiveness. Up to now, you had to enroll in an Income Driven Repayment (IDR) plan like ICR, IBR, PAYE, and REPAYE or the standard 10-year repayment plan. These payments are supposed to be automatically recounted, but keep an eye on it.
Temporary Change #3. Some borrowers missed out because their payments were off by one or two pennies or late by just a few days. As a fix, the Department will automatically adjust PSLF payment counts for payments made on or before October 31, 2021 for borrowers who have already certified some employment for PSLF. This look back is a temporary benefit. So if you have not yet applied for PSLF forgiveness or certified employment do it by October 31, 2022 to get all those payments counted.
Lastly for service members, months spent on active duty will now count toward PSLF, even if your loans are in deferment or forbearance. Federal Student Aid is supposed to develop and implement a process to address this. .
For more information see https://www.ed.gov/news/press-releases/fact-sheet-public-service-loan-forgiveness-pslf-program-overhaul
For tons of helpful information and PSLF application go to the official website at https://studentaid.gov/pslf/
Today we’re talking about the Social Security Normal Retirement Age, also called the Full Retirement Age, which is between ages 65 and 67 depending on the year you were born. When you begin drawing Social Security retirement benefits, the amount you will received each month will depend on whether you start before your normal retirement age, at that age, or after. If you were born before 1937 your Normal Retirement Age is 65. If you were born in 1960 or later, your Normal Retirement Age is age 67. Everybody else, yours is in-between age 65 and 67. Check out your exact Normal Retirement Age in years and months on the Social Security website https://www.ssa.gov/oact/progdata/nra.html.
I highly recommend you go to the Social Security website if you haven’t already, and establish an account. https://www.ssa.gov/site/signin/en/ You’ve been earning Social Security credits based on your earnings record. Your employers have been withholding Social Security and Medical taxes from your pay and reporting to Social Security what they paid you each year. You want to be sure these earnings records are accurate. Your retirement benefit will be based on your highest 35 years of income, so every year is important. Log into ssa.gov once a year and compare what earnings they recorded for last year with your tax documents to and make sure it’s accurate, or correct any mistakes. The website will also give you estimates of future payments. Find out how much you would qualify for if you become disabled, what your family members would receive if you die, and what your Social Security retirement benefits would be.
Your Normal Retirement Age. is the age you can start receiving your full Social Security retirement benefit. The formula used to compute it is very complicated, but its’s easy to see the amount when you log into your account. Everyone eligible can apply and begin receiving benefits anytime from age 62 to age 70. But if you start early you receive less each month. Start later and you receive more. As an example, if you were born in 1990. Your Normal or Full Retirement Age is 67. You want to begin receiving Social Security retirement benefits at age 62. That’s 5 years early, so your monthly benefit would be reduced by 30%. If you full retirement benefit is $2,000 a month, you would receive only $1,400 a month if you start at age 62. You could choose any age between 62 and 67. But the earlier you begin benefits, the lower the payments.
For each year you delay benefits after your full retirement age up to age 70, your benefit will increase by 8% year. That’s huge. In our example. For someone with a full retirement benefit of $2,000 a month, if you delay receiving benefits until you’re age 70, your payment will be $2,480 a month. Looking at the yearly amounts, you could retire with $16,800 a year at 62, $24,000 a year at 67, or $29,760 starting at age 70.
How do you decide when to start drawing benefits? It depends on your situation. Will you have enough resources to live on while you delay? Delaying is a low risk way of getting a higher benefit. How long will you live? Just from a numbers perspective, the longer you live the better off you are delaying benefits. One of the biggest concerns when planning for retirements is making sure you don’t run out of money before you run out of life. Delaying drawing Social Security can help prevent that. If your health is poor and and you think you will die younger than average, it may be better for you to start benefits earlier. Taxes can also impact your decision. Your Social Security benefits are taxed when you other taxable income crosses certain thresholds.
At age 65 Americans are eligible for Medicare and most must enroll Medicare Part B or face a stiff premium penalty. You can delay enrolling in Part B if you or your spouse are working and covered by a workplace group health plan with 20 or more employees. In that case, you would need to enroll in Medicare Part B within 8 months of stopping work or losing your workplace health coverage, which ever is sooner in order to avoid penalty. The penalty is 10% increase in premiums for every 12 months you delay, for the rest of you life.
If you are a federal employee you can carry your Federal Employee Health Benefit (FEHB) into retirement and are not required to sign up for Medicare. You can keep FEHB and sign up for Medicare for more complete coverage. There are pros and cons to to the different strategies. But it’s beyond today’s discussion.
f you are a military retiree and federal government employee you have the option of using FEHB or Tricare for Life when reach age 65. Listen to my Episode 5 for pros and cons if it applies to you. https://www.buzzsprout.com/934996/4770596
The main reason I’m focussing on military Tricare for Life is that it often catches retired military off guard. It’s like a Medicare/Tricare shotgun wedding. Also know as wrap around coverage. Key points:
- The Tricare plan you have now ends at 65, period.
- You are required to enroll in Medicare Parts A and B, if you want continued Tricare health insurance. (Which you should.
- Medicare Part A is free. Medicare Part B will cost you. The standard Part B premium is $148.50 a month. This fee is based on your annual income and is higher after certain tresholds. This is allot more than the Tricare Standard or Prime yearly fees You won’t have any yearly fees to pay to Tricare under Tricare for Life, but will pay premiums to Medicare for Part B.
- But it’s unfair to only compare annual fees and premiums. Tricare for Life is wrap around insurance. What that means is that Mediare and Tricare for Life work together to pay for your healthcare. Medicare pays first. What they don’t cover automatically gets passed to Tricare. Some things Medicare doesn’t cover, but Tricare for Life does. And visa versa. There are a few things neither Medicare or Tricare cover, but nearly every thing is paid for between the two with no copay or cost share. With Tricare for Life, there are no copays or cost shares that you have with regular Tricare.
- Also Tricare for Life covers you overseas. Medicare does not pay outside of the US and some territories. So if you will be living outside the US part or all of the time, Tricare for Life has you covered as the primary payer.
- Eligible family members stay on Tricare Standard or Prime until age 65 when they must sign up for Medicare Part A and B themselves and switch to Tricare for Life.
- Be careful when using Tricare for Life and Veterans Affairs health providers for non-service related care. Because VA providers are not allowed to bill Medicare, you can’t be reimbursed through Tricare for Life for any care from a VA provider, you’d pay for any VA expenses out of pocket.
Great resources and details can be found on the Tricare and Medicare websites, as well as my Episode 5 podcast.
All about Tricare for Life: https://tricare.mil/tfl
Medicare basics and signing up:
https://www.medicare.gov/basics/get-started-with-medicare
Medicare Part B premiums:
https://www.medicare.gov/your-medicare-costs/part-b-costs
By the time you hear this broadcast, I should be on a vacation adventure with my husband Rob in Yosemite National Park. I love visiting new places and it seems like a lifetime since we’ve taken a big trip. So I thought I take a few minutes to talk about saving for a bucket list vacation. Since I’m a financial planner, It shouldn’t be a big surprise that I recommend you start your trip with planning.
The first step is to decide what kind of trip you want to take, and think about what it is about the trip that will make it special for you, and what won’t. Is your dream to lay in the sun on the sand and listen to the waves, then going during hurricane season may literally rain on your parade. Want to visit a famous amusement park? Standing in line all day in the summer heat and humidity may be unbearable for you or make the kids cranky.
Next, figure out how much your vacation will cost. Remember transportation like airfare and rental car or road trip gasoline, hotels or other lodging, food, and entrance, show tickets, tours… Break it out in detail with numbers and add it up for a total trip cost.
Then decide how you will pay for it. If you already have enough money set aside for your trip, you're golden. But I DON’T recommend you go in debt for entertainment or vacations. A better way is to save first, then spend. Studies actually show that we get as much enjoyment thinking about and anticipating something as we do actually doing it. So dream, plan, save, go.
Let’s say you decide you want a weeklong beach vacation with your spouse and two children. You’ve done some checking online and see a beachside hotel is $250 a night, airline flights $1,000, hotel 150 a day, and $100 a day on souvenirs and activitieshat's $4,250.
If you save $150 a month you go on your dream vacation in 2 years and 4 months. Not happy with that? Think back what about your vacation that makes it a dream for you. And what isn’t that big a deal. Let’s say you really love to build sand castles with the kids. But you all just dash in and out of the water. Consider going in the off season when everything is cheaper and the water is cooler.
Kids dragging sand in everywhere sound more like work than vacation? Try a cheaper hotel off the beach with a pool and walk to the beach if you want. Or have the vacation exact vacation you dreamed, but for 4 days. Or drive to save the airfare.
These kinds of tough choices often come up in all areas of life. I like to say you can have anything you want, just not everything. What’s most important to you? Length of time away ? A particular season or year? Special activity? Specific location?
Want to go sooner? Maybe you can save more money now by cutting other regular expenses for a while, or find some ways to earn extra money. I can remember when I was young my parents said the family could go on a vacation to Florida. But my brothers and I would have to save the gas money which was going to be $100. We did odd jobs and skipped desert at school to make it happen. Dreaming about the vacation helped motivate us to save and I think we enjoyed it more having skin in the game.
And our vacation today? It’s epic. We’ve been planning and saving for a couple of years. We both love the outdoors, so we are splurging on lodging inside three national parks. Got train sleeper car ticketst with points. And haveg a cooler for drinks and food to save on eating out. That’s how we are having our dream, guilt-free vacation.
What about you? Focus on the what will really make the trip special for you and negotiate on the everything else. Save more, save longer, or find ways to spend less. The go enjoy your vacation! And know when you came home you’ll have all those special memories and none of the debt weighing you down.
Today we’re going to talk about Cryptocurrencand I’ll try to cut through some of the hype. If your new to crypto, check out Investopedia’s cryptocurrency page. https://www.investopedia.com/cryptocurrency-4427699
Cryptocurrencies are systems that allow for secure payments online directly between individuals without middlemen. Cryptocurrencies use virtual tokens which are created, called mining, on a network of dispersed computers that randomly record blocks of cryptocurrency transactions, called blockchain technology. Bitcoin and Ethereum are two well known cryptocurrencies.
You can make money directly by mining cryptocurrency, but that takes massive computing power. Or by buying a cryptocurrency, and then selling (hopefully) at a profit. The value is based solely on supply and demand and prices have had huge price swings up and down. Blockchain technology is often cited as the real prize. But you can’t buy the blockchain any more than you can buy the internet.
There more ways to play. BlockFi https://www.blockfitrust.com/ is offering an account that pays interest on cryptocurrency deposited with them, as well as cryptocurrency trusts. There are Cryptocurrency exchange-traded funds (ETFs) and Blockchain ETFs that own stocks in companies that have business operations in blockchain technology.
But ingenuity and innovation are still far out pacing regulation and disclosure. Finding information on trading costs is tough. After digging through Coinbase’s website I found “it depends”. They disclose trading costs just before you place a trade. On Venmo, I had to go to the literal fine print . “When you buy or sell cryptocurrency, we will disclose an exchange rate and any fees you will be charged for that transaction. The exchange rate includes a spread that Venmo earns on each purchase and sale.” https://venmo.com/about/crypto/ Grayscale which offers a fund only open to accredited investors clearly states it charges a 2.5% management fee. https://grayscale.com/wp-content/uploads/sites/3/2021/08/dlc-fund-fact-sheet-august-2021.pdf
Price manipulation is another concern. Interestingly, Coinbase addresses this in its crypto slang guide, rather than an easy to find disclosure section. https://www.coinbase.com/learn/tip-and-tutorials/crypto-slang-guide
A pump and dump is a coordinated effort to artificially inflate the price of an asset and cash out before it tumbles back to down. Think Gamestock. The biggest holders of crypto, known as whales, have the potential to move markets with their trades. The top 100 Bitcoin addresses out 800,000 plus held more than 20 percent of all BTC according to bitinfocharts.com.
Lastly, there’s taxes and recordkeeping. You need to keep detailed crypto records to to file your income tax returns, or again pay someone else to do the record keeping for you. The cryptotrader.tax website has a good blog that covers a lot of the (many) tax rules you need to consider. https://cryptotrader.tax/blog/the-traders-guide-to-cryptocurrency-taxes
Keep learning and if you want to start playing in crypto, don’t go all in. I’m not recommending it at all just yet. But if you try it, don’t invest any more than you are willing to completely lose
Two of the biggest questions I get about retirement are “How much do I have to save” and “Do I have enough?” But first we have to step back and answer the question “How much will I spend in retirement?” I recommend you map out your current cash flow, also called a budget, in detail. Spend some time envisioning the kind of lifestyle you want in retirement. Then make adjustments from your current cash flow to build a retirement budget.
Let’s start with income. Pull out your Leave and Earnings Statement and pay stubs. Military look for your total entitlements. Federal civilians look for your base pay plus locality pay . Working spouses and others use a recent pay stub. Jot down these sources of income.
Do the same for expenses. Look for deductions and allotments. Then list t other expenses you pay and categorize them. If possible use a year’s worth of expenses. If you don’t already keep a detailed list of expenses, now’s a good time to start. For now make an educated guess and begin logging your spending. A budgeting app like YNAB or Mint may help.
Now adjust your current expenses to estimate your retirement expenses. Here are some expenses that often change in retirement. Social Security and Medicare taxes are only withheld from money you earn through work. Retirement savings like the Thrift Savings Plan (TSP), 401(k) plans, and IRAs a will stop when you stop work. Drop these expenses from the retirement budget. Will your household living expenses like rent, utilities, income taxes, entertainment, charity, and travel? Adjust the budget.
If you pay off a mortgage, remember you still have to pay your property taxes and homeowners insurance. Will you downsize? Less expensive homes usually have lower property taxes, costs of insurance, utilities, and maintenance. If you want to buy a vacation home your total housing cost will go up.
Food and commuting costs often go down in retirement. Plan on traveling a lot or starting an expensive hobby? Add those higher expenses down in the budget.
Your healthcare costs are likely to go up. Tricare for military retirees is very reasonably. Get costs at https://tricare.mil/-/media/Files/TRICARE/Publications/Misc/Costs_Sheet_2021.pdf However, many military retirees are surprised once you reach age 65. You will be moved to Tricare for Life, which is free. But you are required to sign up for Medicare Parts A&B. Generally there's very little out of pocket expenses. But, you have to pay Medicare Part B premiums, which will be higher than your Tricare Prime or Select premiums were. https://www.medicare.gov/your-medicare-costs/part-b-costs
Federal retirees can carry FEHB into retirement. The premium you pay will be the same as working federal employees, but due to premium conversion you will pay more in taxes. For everyone else, your employer likely paying a large part of your premiums which will much higher if you stop work before Medicare kicks in at 65. Healthcare expenses like nursing home care are a wild card and can spike near the end of your life. Budget for that spike or for long term care insurance premiums.
Once you know what expenses you need to pay in retirement, you can begin planning how to have the income to cover it. Coming up short? The earlier you know this the better. You have time to adjust. You might decide to seek a higher paying job now to save more, retire later, or work part-time in retirement. It’s your retirement and planning early can help you have it your way. Would you like help answering your “Will I have enough?” questions? I love helping clients like you budget, plan, and save for the future you want. You can email me at katie@moneypilotadvisor.com
The Department of Education announced it will extend federal student loan forbearance, again. Forbearance is the temporary suspension of loan payments. This newest extension which the Department called “final” will carry through to the end of January 2022. And notifications to borrows have already started going out.
During this forbearance program, federal loan borrowers are not required to make loan payments AND interest does not accrue on those loans. For our active duty military and federal employees going for Public Service Loan Forgiveness (PSLF), this extension is more great news. This time in forbearance still counts toward your 120 months of payments required for PSLF forgiveness. You will receive credit as though you made on-time monthly payments in the correct amount while on a qualifying repayment plan. To see these qualifying payments reflected in your account, you’ll need to submit a PSLF form certifying your employment for the same period of time as the suspension. Your count of qualifying payments toward PSLF is officially updated only when you update your employment certifications.
According to the Department of Education’s website https://studentaid.gov/announcements-events/coronavirus Once the payment suspension ends, you’ll receive your billing statement or other notice at least 21 days before your payment is due. You will NOT have to re-certify your income before the forbearance period ends, even if your recertification date would have happened prior to that. It looks like will need to re-certify in 2022 if this is the “final” forbearance extension. You should be notified of your new recertification date beforehand. Remember to update your contact information with your loan servicer if you moved, changed phone numbers, or have a new email address.
Your payment amount should return to what it was before your payments were suspended, unless you recertified during forbearance. You can always contact your loan servicer to find out what your payment amount will be when payments start up again.
Finally, Public Service Loan Forgiveness is a great program, but it does require you to follow strict rules to get your loans forgiven in the end. So here’s a few tips. First, don’t make larger payments than necessary. Paying more than necessary is money out of your pocket now means you will have less of your loan forgiven when you do reach your 120 qualifying payments.
Don’t make payments more than once a month, the extra payments won’t count as qualifying payments. Remember to submit your Employment Certification form every year and save proof of you full-time employment like your IRS W-2. T
Also, if you are going to consolidate your federal loans, do it soon after you graduate from college. Or don’t do it. When you consolidate, your 120-payment clock gets reset. You have start counting your payments all over again.
Also, the 120 payments don’t have to be consecutive. If you take some time off from public service work, you can come back in and start where you left off. This is especially important for our servicemembers who transition out of the military with less than 10 years of service, but plan to continue in some type of public service.
The rules and paperwork can be a pain, but the PSLF rewards can be huge. Be sure you’re in the right repayment plan, your loan payments are qualifying, and you are re-certifying every year. For more information check out https://studentaid.gov/pslf/ and their article Become a Public Service Loan Forgiveness (PSLF) Help Tool Ninja https://studentaid.gov/articles/become-a-pslf-help-tool-ninja/
Today were celebrating episode 60 by talking about Guard and Reserve retirement. If you find trying to figure out what your retirement pay will be and how to qualify, you are not alone. Here's a link to the online DoD retirement calculator https://militarypay.defense.gov/Calculators.aspx and Doug Nordman’s blog post in The Military Guide at https://the-military-guide.com/reserve-retirement-calculator/ Doug gives you the numbers and formulas written out more background.
First, to determine if you will be eligible for retirement you need to look at the number of points you build up and the number of “good years” you completed. When you’ve cleared these two hurdles, you’ll translate your points earned into years of service for the purpose of calculating your retirement pay. Once you're eligible for retirement you can continue to serve or retire. But a key difference between a reserve retirement and an active duty retirement is that with few exceptions, you won’t actually start receiving your retirement pension until you reach age 60. You earn 15points for each year of service. Drilling reservists and Inactive Ready Reserve (IRR) get these 15 points a year. You accumulate more points for drill weekends, active duty periods, and things like serving on funeral honors detail. Every active duty day count is one point. Each drill counts one point, usually 4 a weekend.
For example, a drilling reservist could earn 77 points one year: 15 points for annual participation, 48 points for four drills a month for 12 months, and 14 points for 14 days of annual training.
A good year is when you earn a minimum of 50 points within a 12 month period and maintain your mobilization readiness. Your considered eligible for retirement when you’ve completed 20 good years of service. Continue serving and earning more points will increase your retirement pension.
When you retire you have a very important decision to make. You either Retire Awaiting Pay or Resign. The key benefits of Retire Awaiting Pay are your seniority continues to accumulate as if you were still serving, called longevity. And when you reach 60 your retirement pay will be based on active duty pay table in effect that year. However, you could still be recalled to duty for full mobilization. Almost every Guard and Reserve retiree chooses to Retire Awaiting Pay and take the risk. If you resign your pension will be frozen at your resignation date.
You should receive a Notification of Eligibility once you had 20 good years. Keep this and a record of your points earned a safe place. Your retirement pay won’t start automatically at age 60. You will need to file and don’t delay. If you wait more than six years you will lose one day of pay for any day more than that you waited.
How much will you get paid? First, divide your total earned points by 360 to translate points into years. Then if you’re a Final Pay or High Three retiree multiply those “years” times 2.5% times your pay on the pay scale for the year you turn 60. Again, those years in rank, or longevity, continued to tick up while you were retired awaiting pay so look for that column on the pay chart. If you’re in the Blended Retirement System or BRS, it’s 2.0% times your years times your pay. And remember, you can only use the pay chart for the year you turn 60 if you chose to retire awaiting pay. If you chose to resign, use the pay chart and years of service for the year you resigned.
You may be eligible to begin retirement pay three months early for every 90 consecutive days of mobilization for war or national emergency.
Have more questions about your Guard Reserve retirement, reach out to katie@moneypilotadvior.com
When your reach 59 ½ years old you can withdraw money from your qualified retirement plans like Thrift Savings Plan (TSP), 401k, and IRAs without paying the 10% early withdrawal penalty tax. There are some exceptions to the 10% tax penalty. In particular if your separate from service after you reach 55 years old, you can begin withdrawing from that employer’s retirement plan penalty free. And there are a just a few other exceptions to the early withdrawal penalty.
You also need to know if you make withdrawals from a ROTH IRA, ROTH TSP, or ROTH 401k, you can withdraw your contributions penalty free. But your earnings taken from the ROTH within 5 years of our first contribution will be subject to the 10% early withdrawal penalty, even if you’re over 59 1/2.
Otherwise, when you reach 59 ½, no more tax penalty. You will still owe income tax on withdrawals from regular IRA, 401k and Traditional TSP, but the penalty is behind you. If you are still working, like most people this age, you can still continue contributing to your retirement accounts including cathup contributions after age 50.
In the meantime, it's a good time to take inventory and take another look at how you envision your retirement. When would you like to stop working? Or perhaps go to part time? What will your retirement lifestyle be like? What budget will you need to support that lifestyle? Up through our fifties, most people save as much as they can, or have had a particular target amount of savings for retirement. By 60 it’s a great time to see if you are still on track or if your needs or wants have changed. It’s gets harder to make up ground as you close in on retirement, so the sooner you know if you need to make any changes the better.
While it is best to leave your retirement saving to grow, it is good to know that if you need to you can access your qualified retirement plans after 59 ½ without a tax penalty. It can act as an emergency fund allowing you to save more now if you need to. And this may be a great time to “test drive” a retirement budget. By saving more now, you will have less cash available for spending. You can see how that tighter budget might fit your lifestyle and needs in retirement. This could give you more confidence that you are on track or may push you to consider other options like working longer or part time.
Another factor to consider as your looking forward is what will you do for health insurance if you stop working before age 65 when you would be eligible for Medicare? Military retirees are covered by Tricare, including Guard and Reserve retirees over age 60. But the cost of healthcare insurance can be shocking when it is no longer sponsored and subsidized by your employer. Know your options and costs.
And lastly, if you haven’t already, open an account on the Social Security website at https://www.ssa.gov/myaccount/ . They gave great tools and online calculators to estimate your social security payments for different scenarios based on your personal earnings history at https://www.ssa.gov/benefits/calculators/
So to wrap things up,once you hit 59 1/2 you can withdraw saving from any regular IRA or 401k and Traditional TSP penalty free. You just pay the income tax. ROTH accounts are also penalty free after 59 ½ as long as it’s also been 5 years since your first contribution. But don’t withdraw your money just because you can. It’s a great time to take another closer look at your retirement pan and savings so far. Refine your budget, see if you need save more work longer. And also make a plan for healthcare and Social Security, both of which we’ll talk about in future episode.
Have a question you’d like answered on a future podcast, sent it my way to katie@moneypilotadvisor.com
Today we’re talking about the Thrift Savings Plan (TSP) Annuity option. Don’t confuse the TSP Annuity option with being a FERS, CSRS, or Military annuitant. An annuitant is someone entitled to regular payments from a pension or an annuity. OPM and DFAS will call you an annuitant because you are receiving pension payments as a retiree. If you choose to turn your TSP into an annuity, this something else entirely. .
An annuity is insurance that you can buy with all or part of your TSP savings. TSP will buy it for ou from Met Life. MetLife then sends you set monthly payments for the rest of your life (or your spouse too if you choose a joint life annuity). The money you use to buy an annuity is gone permanently in exchange for guaranteed lifetime monthly payments. The TSP has a great fact sheet at https://www.tsp.gov/annuity-basics/ The annuity is a permanent contract that can’t be changed and the annuity payment amounts are set for life. So with inflation, your annuity income will buy less and less over time. While Social Security, military and federal civilian pensions rise with inflation, called a COLA, the TSP annuity payouts are frozen in time.
There are options you can add to the annuity, at a cost. An increasing payments option an help protect against the loss of buying power due to inflation. It has a set 2% increase in the payments you receive each year, whether inflation is more or less than that.
There is joint life annuity with payments that continue at 100% or 50% until both you and your spouse die, or under certain circumstances a dependent dies.
If you die before the amount paid to purchase your annuity has been paid out, the rest will be paid to your beneficiary(ies) in a lump sum. The 10-year certain option guarantees your beneficiary will receive at least 10 years worth of payments if you die within the first 10 years. Remember, more nice options equals lower monthly payments to you.
TSP has a great online calculator that will walk you through getting an estimated payment based on the amount of TSP money you give up and the options you want. https://www.tsp.gov/calculators/tsp-payment-and-annuity-calculator/#top
Consider how comfortable are you with uncertainty or risk. If you are more afraid of running completely out of money because you live a long time, an annuity may be a good choice. Are you more concerned that a fixed income may leave you struggling to pay for your needs in the future because of higher prices? Keeping your money in TSP or other investments with growth potential may be a better bet. It may help to go back to last weeks Episode 57 on Risk Profiles.
Are you be eligible for a military pension, federal government pension, and/or Social Security? Remember, these pensions are guaranteed for life, too. But they DO increase with inflation. An annuity may not add much benefit is this case. Keeping your TSP invested instead may be a good way of maintaining some control, flexibility, and the possibility of more growth. What if you didn’t stay in long enough to qualify for a pension? An annuity might look a bit more attractive if you really don’t tolerate risk. Even then, shop around.
And lastly, if you want a fixed monthly payment out of your TSP, there is an alternative to an annuity. You can keep your money in the TSP you can choose regular installment withdrawal instead of an annuity. You recieve a certain amount from your TSP every month, quarter, or year (your choice). Your money stays in your TSP account, you choose how it is invested, you can stop and start these payments, and even change the payment amount. But, there is no guarantee that your TSP will last as
A risk profile is used to help you select an appropriate investment mix to best meet your unique needs while also staying in your individual comfort zone. Risk is the chance that the value on your investments will go up and down. We consider a steady eddy investment is less risky. A high flier with large up and down swings, more risky. You may make smart investments that are risky in the hope your investments will grow and provide money for your future.
As a financial planner is help plan, save, and invest for your needs and dreams. A key step is to help you identify your willingness and ability to take on risk in your investment portfolio. If you express a strong desire not to see the value of your account decline and are willing to give up potential investment growth to smooth things out, we say you have a low willingness to take on risk or are risk-averse.
If an you have a desire for the highest possible growth on your investments and are willing to endure large swings in the value of your account to achieve it, you have a high willingness to take on risk and are a risk seeker. I usually talk with my clients about their relationship with money and use a questionnaire that asks questions. The worst time to find out that you don’t really like to take a lot of risk is after your investment drops by half overnight. You can’t sleep, you can’t think, your terrified you’ll lose the rest, and you bail out at the bottom, locking in those huge losses.
What’s your ability to take on risk? If you saved well in a retirement account or TSP, have a solid emergency fund and insurance coverage, and a dependable job or a government pension you have a higher ability to take on risk. If your investments take a temporary dive, you have other assets to tap if you need to. Also, the more time you have, the more ability you have to take on risk. Most investment portfolio losses are temporary, if you leave them be. This is why younger people with low debt and solid savings often have a higher risk ability. And if they also have a matching comfort with taking risk, an investment portfolio heavy in more volatile stocks that offer higher reward may be a great fit.
The opposite may be a 80 year old retiree living on Social Security and taking withdrawals from very modest savings. They may not be able to work more if they have unexpected expenses or cost of living increases, so they have to live on what they have. They probably won’t have the ability or time to recover from a huge drop on the value of their investment portfolio. This person would have a low risk ability, even if they are willing to take on risk.
As an advisor, I generally recommend investing based on the lowest risk, either your willingness to take on risk or your ability. What if you want or need higher investment growth? If the challenge is your ability to take risk, shoring up your safety net is the first step. An emergency fund, insurance, and the flexibility to tighten your belt if need be will increase your ability to take on more risk, and in the long haul enjoy higher investment rewards.
What if your risk tolerance, or comfort taking risks with your investments is low? Focus on smoothing your investment returns with diversification and investments that are lower risk, lower reward like more bonds may be a good move. But you’ll need to take a realistic look at whether this investment growth will provide for your future needs and wants.
A good financial planner, like me, is a great way to explore your risk profile, see how it matches up with your needs and dreams, and help you save and invest to reach your best future. If you prefer to go it alone, most investment platforms offer online tools to help you identify your willingness to take investment risk. If you have any questions, or want help with your special needs and dreams reach out. I live to help.
Back in Episode 41 we talked about inflation basics. Today we’ll talk some more about what inflation is, who has the mission to control inflation, what we can expect, and some ideas on how it may affect you.
Put simply, inflation makes things you buy cost more. Another way to look at it, is that $1 after inflation is worth less, it has less buying power. Inflation is usually quoted as a percent per year. The Federal Reserve, often called "the Fed," is the central bank of the United States. A key mission of the Fed is to foster both maximum employment in the US and maintain price stability which interprets as keeping inflation growing at about 2% a year over the long-term. This can be a tricky balancing act. There are a lot of things that affect employment and inflation.
Unemployment is still well above pre-COVID levels. The Fed Chairman has said that he is focused on getting back to full employment and that he won’t be swayed by temporary rises in inflation. And the Fed announced last August that it would tolerate higher inflation than its 2% target rate for a modest period of time since inflation has been too low for the last 10 to 15 years.
Higher inflation isn’t necessarily a bad thing. If you have debt l you’ll be paying your loan back with dollars that are worth less than they are now. But for retirees living on a fixed income, each dollar buys less than it used to. Americans that were able to work through the pandemic generally spent less and saved, and now have more money to spend. There is a pent up demand for more goods and services.
If you have a home mortgage, see if refinancing while interest rates are still low makes sense for you. And if, if inflation is rising, don’t be in a hurry to pay that low interest rate loan off faster than necessary. Remember, you will be paying the loan back in the future with dollars that will be worth less because of inflation.
Stay the course with your long term investment goals. Stay diversified. Now is not the time to bet the farm and go all in on gold, or any other one “inflation proof” “sure thing.” Gold and real estate do tend to hold up well to inflation, but they are not fool proof. Gold and other commodities have huge price swings, they are very volatile. Real estate tends to beat inflation over the long haul, but with record low mortgage rates the real estate market is hot and prices are already high right now.
When your investments are diversified, for example with US and foreign stocks and bonds, perhaps real estate, and maybe even a gold or oil mutual fund you can rebalance when one investment category does much better or worse. This is a simple way of buying low and selling high.
Generally, wages tend to follow inflation up. If high inflation starts putting the pinch on, it may be a good time to ask for a raise. Or find another career that you enjoy, and that pays well will help you build a good financial future despite inflation.
If you’re a military retiree or CSRS federal employee you enjoy full cost of living adjustments (COLA) each year . FERS federal employees receive a smaller COLA and you won’t receive any COLA on your retirement pay until you reach age 62. Will permanently reduce your pension’s buying power. Higher inflation may be a good reason to stay in until 62. FERS employees who retire under the special provisions s can retire younger and begin receiving their COLA immediately.
Fortunately, Social Security payments are tied to general inflation and should maintain buying power better. Now for anyone that might have the ever-more-rare private pension or annuity, your pension is likely fixed. High inflation can significantly erode the purchasing power of your pension. And if that pension or annuity makes up a large part of your income in retirement, with higher inflation you may need to find other sources of income or reduce your expenses.
Hello and welcome to the 55th Episode of the Money Pilot Financial Advisor Podcast. For those of you who have stuck with the podcast to middle age, Thank You! I love speaking with you each week and bringing you info on money and finance that you can use to live your best life. In celebration of Episode 55, today we’re talking about you turning 55 and your Thrift Savings Plan (TSP). TSP is very similar to a workplace 401k. But there are a few differences and today’s discussion is about one, TSP and being age 55.
You have probably heard that you can’t withdraw money from your TSP before age 59 ½ without paying a 10% tax penalty. But if you separate from service in the year you turn 55 years old or later, you can withdraw any or all of your TSP without paying the 10 % penalty. You will still have to pay tax on Traditional TSP withdrawals, but you won’t face a penalty.
Now, if you are a federal employee under the special retirement provision for law enforcement, firefighting, and air traffic control personnel who reach retirement eligibility earlier than other federal employees, you can make penalty-free withdrawals from TSP when you separate from service at age 50 or later.
This penalty-free withdrawal is only available if you separate from service when you are age 55 or older. This applies to both military and civilians. In practice, few military will be able to serve until age 55, even if you wanted to. But if you do, you can take advantage of this penalty-free withdrawal just like the civilians. If you separate or retire before that, you won’t be able to take advantage of this when you turn 55. You must separate at 55 or later. Or if you are under the civilian special retirement provision age 50 or later.
Just because you can tap your TSP early without penalty, it doesn’t necessarily mean it is a good idea. You could be living in retirement for 40 more years. TSP makes up a key component of Federal Employee Retirement System (FERS) and military Blended Retirement System (BRS) retirements. Leaving TSP to grow can help offset higher costs of living later in life because of inflation and higher need, like more healthcare as you age. But if you need it, maybe for a gap in income or a one- time expense, you can takea TSP distribution without a penalty if you separate at 55 or later.
For example, minimum retirement age for most FERS employees is between 55 and 57 years old. But you can only begin receiving retirement benefits at that MRA if you have 30 years of service. If you have at least 20 years of service you can receive your full retirement pay starting at age 60. This is a good example of a situation where you might need or want to tap TSP early. If your federal MRA is age 56 and you call it quits at age 58 with 26 years of service. You’ll eligible for your full retirement at age 60. But still that’s 2 years away. You may have saved enough to tide you over to 60, or take up another job outside of government service. But if you still have a gap and need a source of income for those 2 years before your pension starts, this rule could be a solution.
To wrap up, anyone can begin withdrawals from your TSP any time after you reach age 59 ½ without penalty. But if you separate from service when you are age 55 or older, you can begin distributions from TSP without paying the 10% penalty anytime. Just remember you will still owe income tax on distributions from Traditional TSP. But if you meet the 55-year-old rule, you won’t have to pay the additional 10% early withdrawal penalty. And lastly if you under special retirement provisions, the rule is 50 or older for you.
I hope you’ve enjoyed today’s podcast and keep your questions coming. I specialize in helping military and federal employees navigate transitions and gaps. If you’d like help with your financial decision making, reach out, I’m here for you.
In March of this year the American Rescue Plan Act of 2021 was signed into law. One of the key elements of this new bill was the expansion of the Child Tax Credit for 2021. A few important points about this tax credit increase is that it only applies for 2021, the amounts of the tax credit went up, the tax credit is fully refundable, and more children qualify. Also for the first time, families will receive a tax credit in advance beginning next week. S
Here are the details. First, for children under age six the child tax credit has increased from $2,000 to $3,600 per child. If you have a newborn any time during 2021, that child will also qualify for the full $3,600 credit. For children ages six to seventeen the child tax credit has increased to $3,000 per child. So not only have the amounts of the credit gone up, but this year seventeen year olds also qualify.
For dependent children that are 18 years old, you will receive a one time tax credit of $500. And for dependent children ages 19 to 24 that are full-time college students you’ll also receive a one time tax credit of $500.
Another big change is that this year families will receive one-half of their Child Tax Credit in advance for children 17 and under. Beginning July 15th you will receive half of the credit spread out over the next six months, and the other half of the credit when you file your 2021 tax return. For each child under age six you will receive $300 a month from July to December, then the rest, $1,800 per child, when you file your tax return after the end of the year. For children six to seventeen, the payments will be $250 per month, and $1,500 when you file.
If you get tax refunds from he IRS through direct deposit, you should get these payments in your bank account on the 15th of each months until the end of the year. If you don’t use direct deposit, you should receive your payments in the mail around the same time.
Note that a child must live with you at least six months out of the year, must be a US citizen and have a Social Security number. Also there's a phase out of the credit based on for income. If you file as head of household and have an adjusted gross income (AGI) of $112,500 or less you get the full tax credit amount. Married filing jointly your AGI needs to be $150,000 or less to qualify for the full amount. Both phases out above that. Also for this year, the child tax credit is fully refundable, soeven families no income will receive the full amount of the tax credit.
If you filed tax returns for 2019 or 2020, or if you signed up as a non-filer last year to receive stimulus checks, you are already signed up and don’t need to take action. Otherwise, you can sign up using the IRS Non-filer Signup Tool to start the monthly payments at: https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool
And lastly, it’s important to remember, that while there is talk of making these changes permanent, it is still only in place for 2021. And will revert back to the old rules for 2022. Keep in mind, the monthly payments aren’t additional credits. Th IRS is paying you half of tax credit in advance. So the refund you receive when you file next spring may be less than you got last year, and the monthly payments won’t be made in 2022 either unless the law is changes again. So, you’ll want to plan on that in your budget next year.
If you have any questions or would like my help with your financial life, got to my website www.moneypilotadvisor.com and drop me a line.
When you buy a bond you are make a loan and they have to pay you back with interest. Companies as well as local, state, and federal governments issue bonds you can buy as an investment. Most bonds have a face value of $1,000, and a set interest rate they will pay for a fixed period of time. A bond with 4% interest that will mature (expire) in 10 years will pay you 4% interest, usually two times a year, for 10 years and then you get your initial $1,000 back. The interest payments are predictable and can be a steady source of income. Because of this they are generally considered less risky than stocks. Some government bonds don’t pay you the interest as you go along, but pay it all at the end. They are called a zero-coupon bonds and are issued for less than their face value.
Some bonds pay more interest than others. Like during COVID when overall interest rates are very low. Another key factor is how credit worthy is the issuer. The federal government is considered the most credit worthy. So they can pay lower interest rates on their bonds. A company that is struggling financially would have to pay the highest interest rates. Those bonds are typically called high yield or junk bonds. Lastly, bonds that are issued with a short maturity like 3 years will offer lower interest rates than bonds with a long maturity like 30-year.
You can buy federal government bonds directly from the government. And like stocks,you can buy individual bonds through exchanges, that is the market. But buying individual bonds to build a portfolio can be pretty complex. Part of the complexity is that a $1,000 almost always sells for a higher or lower price in the market where prices are based on supply and demand. Most individual investors get into bonds through a mutual fund or exchange traded fund (ETF). The funds buy many bonds to diversify and you own a slice of all that when you invest in the bond fund.
For our military and federal employees, you can invest in bonds through the Thrift Savings Plan. TSP offers two bond funds the F fund and the G Fund. The F Fund invests in a wide range investment grade (no junk bonds), US government and corporate bonds. The G Fund is unique. It invests in only US Government issued securities that are only available to TSP. It is guaranteed not to lose money and in that way is extremely safe. However, because it is so safe the interest the G Fund pays is also low and may not keep up with inflation.
I already mentioned the steady, predictable income that bond interest can provide. This may be especially useful when retire and could use the cash for regular expenses. Also bond prices tend to less volatile than stocks. So when stocks drop, bond usually values drop less or even increase some. This is really good if you will need to cash in some of your investments at a particular time, like for a home down payment, college tuition, or upcoming transition out of the military. Most likely your bond investments won’t grow as much as your stock investments, overall. But they are much less likely to plummet in value right before you need it.
In general, stocks are king when you can leave the money there and let it grow. If you're retirement that is still 30 years off, you may be in all stocks. Will you need to cash from your investment in a few years for a big purchase or for living expenses? Bonds are a steadier, safer bet. Just don’t expect a lot of growth. If you fall in between,mix of stocks and bonds may be ideal for you. Does a mix sound hard? You can invest in a TSP Lifecycle Fund or other target date fund. You choose a year you will need he money. The fund will automatically invest for you and gradually shift from stocks to bonds as you get closer.
Would like my help with your unique situation? Reach me at moneypilotadivosr.com
Today we are talking stocks, what they are, their benefits, their risks, and how you can invest in them. Stocks are also called shares or equities. When you own a stock, you are an owner. Yes, if you own one share of Amazon stock, you are an Amazon company owner. All owners participate in is sharing the profits. When a company like Amazon earns a profit, they may retain or keep some of that money to make improvements like buying new equipment or expanding operations. Or they may share some of profits with the owners by issuing dividends. Some companies may keep all the profits. And some regularly return profits to owners through dividends. That’s cash back, usually four times a year. The hope is that the overall value of the company grows and as an owner you own a share of that value. The value of your share has literally gone up, even if you don't receive dividends.
Unfortunately, even when a company keeps it’s profits to improve operations, it doesn’t always go up in value. In fact, it’s common for stock values to go up and down, sometimes a lot. And sometimes a company’s stock price never fully recover from a big drop. It may be because the company made poor choices or the overall economy of the country caused the problems. and it could go belly up.
Overall stocks in the US have averaged an annual return (that is the profit stock owners make) of 10% a year over the last 100 years. The risks are that stock prices go up and down like a roller coaster. And you might have to sell a stock for less than you paid for it.
The best way to minimize risks is to diversify by buying shares in many companies, including those in different lines of business. There are three ways of doing this with limited cash. Fractional shares, mutual funds, and exchange traded funds (ETF). Fractional shares, also called share slices, are just what they sound like. You work through a broker dealer like Charles Schwab, Fidelity, or Betterment and you can buy partial shares, or tiny slices of many different stocks. A basket with many different stocks is called a diversified portfolio. With share slices you can choose your stocks and build a diversified portfolio with less than $100.
You have plenty of things to do other than research hundreds of companies to try to build your own special portfolio? Me too. That brings us to mutual funds and ETFs. With both of these, they pool your money with many, many other people’s. The fund then goes and buys lots of stock in many different companies. These funds do the research and all the buying and selling for you, and will send you your share of any dividends or reinvest that money for you in the fund.
The value of a mutual fund goes up and down based on the value of all the company stock it bought with the pooled money. When you want to take money out of the mutual fund, you get the money from the fund based on the overall fund value at the end of the day. You can invest in a mutual fund directly with a fund like Vanguard. Or buy mutual fund shares from a broker dealer. Exchange traded funds also pool investor money and operate a lot like mutual funds, but ETF shares are traded on the stock exchange, so ETF prices fluctuate during the day based on supply and demand. The funds still can’t guarantee a certain returnor that you won’t lose money, but the risk is much lower than buying stock in just one company.
What if you have to sell when prices are down? The stock market can provide a very good return on your money over time. It is a good place to invest money you don't need for at least five years. For short term goals a savings account is a safer place save. Check out podcast Episode 39 Stash the Cash for more. For mid term goals or goals that will start soon but continue for a long time (like an upcoming retirement) a mix of stocks and bonds may be a good choice. Next week we’ll talk all about bonds, so stay tuned.
Today we’re going to talk about depreciation and how that affects your taxes. First I want to clear up, depreciation only applies to rental property you rent out to others and collect rental income. Not the home you live in. Also, today’s discussion applies only to those of you who are not real estate professionals, they fall under some different rules.
Rental property owners use depreciation to deduct the purchase price and improvement costs of the property from your tax returns over time, and depreciation is required by the IRS. There are a lot of rules involved and good record keeping is important. Depreciation is claimed as a deduction yearly, the information is carried over on your tax returns year after year, and will also impact your taxes when you eventually sell the property or the it out of service as a rental. See IRS publication 527 Residential Rental Property. https://www.irs.gov/publications/p527 Consider having an accountant do your taxes for your first year with the rental property to get your started out right, even if you do your own taxes again after that.
In short, depreciation can decrease the taxes you pay while you own the property and are earning rental income, but will increase the taxes you would otherwise pay when you sell it, something called recapture. Depreciation only applies to your rental property structure and improvements that typically wear out over time, not the land itse
Depreciation is calculated based on IRS rules and distributes the deduction across what the IRS considers the useful life of the property. You can find these depreciation tables in IRS Pub 527 and most tax preparation software have these tables built in.
So in the first year you put your rental property in service, you’ll have one depreciation schedule for what you paid for the house structure plus any immediate improvements, and expenses to get it ready to rent. That schedule will be updated each year with that year’s depreciation and a running total. Each additional improvement you make, will begin its own depreciation schedule.
At tax time, you deduct the depreciation allowed for that year from your rental income like you would other rental expenses on your tax form Schedule E. But you can’t deduct a rental property loss from your taxable income that year. It will be carried forward until your property reports a profit or is sold.
Depreciation starts as soon as you place the property in service as a rental property or when it's ready and available to use as a rental. So your first year’s taxes you may only be able to claim only a partial depreciation deduction.
When you sell your rental you will pay capital gains tax on the amount you receive from the sale minus its basis just like many other investments. But there is one tricky part. You will be subject to depreciation recapture. All the cumulative depreciation you claimed, will be taxed at your regular income tax rate in the year of the sale.
Calculations on the IRS Form for this are pretty convoluted, it’s an entire page. But the important thing to understand is the concept that the “profit” from the sale, that is the sale proceeds you receive minus what you originally paid and improvements you made, is taxed at a lower capital gains tax rate. The total depreciation that you reported over the years will be taxed all at once when you sell the property, or take it out of service, at your higher income tax rate. That’s the depreciation recapture that takes some first time rental property owners by surprise.
For information on how to figure and report any gain or loss from the sale, exchange, or other disposition of your rental property, see IRS Publication 544, Sales and Other Dispositions of Assets
https://www.irs.gov/publications/p54
Since our podcast is 50 years old today, I thought we’d talk about things to consider when you turn 50. Let’s start with catch up contributions. The normal contribution limit 401k and TSP is $19,500 per year. But, if you turn 50 anytime this year or are you’re already 50 years old, you can contribute an extra $6,500. Those contributions can be traditional pre-tax contributions or ROTH contributions or a combination of the two as long as your total doesn’t exceed $26,000.
IRA’s have their own rules and limits. The 2021 IRAs contribution limit is $6,000 a year, plus the extra catchup contribution of $1,000, for a total limit of $7,000 a year, if your 50 and over. I want to point out that the rules for 401k/TSP are completely separate from IRAs. IRAs are available to everyone with earned income, and even their non-working spouses. So if your employer offers a 401k or TSP, and you are 50 or older, you can contribute up to $26,000 a year to that, $7,000 to and IRA for you, and if you have a spouse with little or no earned income, you contribute to an IRA for them as well. You spouse’s IRA limit would also be $6,000 if they are under 50, or $7,000 if they are over.
It’s also a great time to review whether you want to make ROTH or traditional contributions. The limits are the same for each, but they are taxed differently. I did a three part series in my podcast all about ROTH and Traditional retirement accounts. This would be a great time to go back and listen to those again if you have any questions about these confusing rules. The shows are: Episode 28 Meet ROTH, Episode 29 ROTH IRA, and Episode 30 To ROTH of NOT to ROTH. I’ll put links to those episodes in the show notes.
https://www.buzzsprout.com/934996/7264000
https://www.buzzsprout.com/934996/7366591
https://www.buzzsprout.com/934996/7503172
As you turn 50 your probably in highest earning years. And some of your expenses may be going down. Grown children may be moving out and finishing school. You may have paid off your mortgage or other debt. Now may be a good time to re-look you budget to find some more cash for retirement savings.
Here’s a couple of other thoughts about working and saving after 50. Lately I have been talking with some clients about the cost and benefit of carrying a mortgage right now. If you want to max out your retirement plan contributions, but don’t have the cashflow to do that, you might consider refinancing. Interest rates are very low right now. A lower rate, or maybe even a slightly longer time, might free up enough cash to maximize your retirement savings.
Another thing to look at is ROTH vs Traditional contributions. Just starting out in the workforce, it usually makes sense to make ROTH contributionsbecause, you are likely in one of the lowest tax brackets of your life. So tax wise this makes a lot of sense. As you get older, if you are earn more money and stepup into higher tax brackets the tax benefit is lessened. So if you hit fifty and don’t have the cashflow to max out your retirement savings contributions, you might consider switching from ROTH contributions to Traditional. Then use the amount that your taxes go down each year to increase you retirement contributions.
Your fiftieth birthday may be a good time to give your investment asset allocation a checkup. It’s not necessarily the time to radically reduce you risk, like putting the majority of your saving in bonds or TSP G or F funds. You may need those investments another 50 years. It's a good time to reassess your particular situation and have an allocation that can meet your needs when you retire and still work for you over the long haul.
Here’s to another great 50 episodes of podcasting together!
People have been asking, “with home prices rising so fast, do I need to up my home insurance?” Spoiler alert – yes you may need to up your coverage, but not for the reason you think. So today we’ll talk about your homeowner’s insurance, including a quick review of what’s covered and how to make sure you have enough coverage.
The housing market has been really hot lately. That means the value of your home may also be higher now. Surprisingly the market price of your home doesn’t determine the amount of your coverage, you need if your house is damaged or destroyed. Homeowners insurance covers replacement of the building, it has no relation to the value of the land that it sits on. The cost of replacing your home is most affected by cost of building materials and labor, not how “hot” the real estate market is.
But, it happens that rebuilding, costs have really jumped up lately too. So if you insured your home for X dollars when you bought it, that might not be enough to repair or replace it now if you have a loss, even with replacement cost coverage. Most insurance requires you to maintain a coverage amount that is at least 80% of the current replacement cost. So if you insured your home for $150,000 when you bought it and construction costs have gone up and now the cost to replace your home would be $200,000. If a fire does $100,000 worth of damage to your home, the insurance company would pay $75,000 and you would be on the hook for $25,000. That’s an ugly surprise. If you had been covered for at least $160,000 which is 80%, the insurance would have picked up the whole $100,000 tab.
So what am I saying? Do a regular checkup with your insurance provider. Here’s a few other tips and areas to discuss with them.
The amount of your insurance is coverage for your house. Separate structures like a detached garage, shed, or barn are typically covered up to 10% of your home coverage. So if you have $200,000 of home coverage, your other buildings are insured up to $20,000. This is fine for most people, but if you have farm with a large barn or a detached garage with and mother-in-law suite, you may want additional coverage. Again talk about it with your agent or insurance company.
Homeowner’s insurance also covers your personal property, usually up to 70% of the value of the home. Coverage applies to everything in your home besides the house itself— furniture, appliances, clothes, electronics, and even food in the fridge. I recommend you keep an inventory of these items. One of the simplest ways to do this is to walk through your home and take pictures of everything. Some expensive items, like jewelry, art, musical instruments, collections, and even gold bullion or cash have very limited coverage, much lower than their actual value. If you have anything like this, check your policy for details about how much they will reimburse and look into additional coverage.
One of the most important things to know about your policy coverage is if it’s Replacement Cost Coverage (the best) or Actual Cash Value (avoid). For your belongings you can think of Replacement Cost coverage as the cost to buy new replacements for what you lost. Actual cash value is its value based on what it would cost to buy something of the same age and wear and tear. Think of actual cash value as what you could get for the item on eBay. Your home is similar. The insurance company will depreciate, that is lower the amount they would pay out based on the age of the home, if you have actual cash value coverage. I definitely recommend you purchase Replacement Cost coverage.
And one more note, read your policy to see under what circumstances, called perils, will your insurance cover a loss. Most insurance covers a wide range of scenarios. But, standard policies DO NOT include damage from floods, you have to buy a separate policy for that. I do recommend flood insurance.
This week, we're going to talk about how to bridge the gap if you've decided you want to try something you've always dreamed about, find a different career, or just take a much needed break. When planning for this, think what do you want this gap to be and for how long. Then come up with a budget for that gap. Your current budget is a good place to start, then make adjustments.
Another key budget consideration is health insurance. This is NOT the place to skimp. It's not worth putting your whole financial future at risk by skipping health care insurance. This can be a bit of a challenge, but there are options. For example, if you're in the military you're when you transition out, you’re eligible for the Continued Health Care Benefit Program,but it is quite expensive. Anyone, can shop for health insurance on healthcare.gov. There's different plans you can choose from and you may qualify for a tax credit to pay for some of the premium costs.. You will need to know where you plan to home base, because these plans vary by state. If you're healthy you may save money selecting a high deductible health plan. Your premiums would be lower in exchange for paying more out of pocket expenses and having a higher catastrophic cap
Next consider life insurance. If you have someone you support financially who would struggle without your income when you pass, like children and or a spouse that has been out of the workforce awhile, or is earning a lower income, you need to plan for continuing life insurance during your gap. If you are meeting that need now with workplace group life insurance like SGLI or FEGLI, you will need to buy life insurance before you start your gap. Term life insurance policies are usually quite reasonably priced.
Once you've developed a budget for your gap t, look at how much time you have until your gap starts, and put a dollar figure on much you need to save from each paycheck to get there.
The last big decision is what to do with those savings until you need them. If you're one to three years out from your gap, the best thing to do is save that money in an FDIC insured bank account. That can be a savings account, a money market account at a bank, or certificates of deposit.
If your gap is more than three years away depending on your tolerance for risk and whether you've got flexibility in the timing of your gap, you may earn a higher return. But that means taking some risk. Bonds are often a good choice for these sort of mid-term goals. Your returns will fluctuate, but not as much as stocks. Stock are riskier, but on average provide even higher returns. It's helpful to have some flexibility in timing your gap. If for instance, you're able to just put it off a year, you can continue saving, and that gives time for the markets to rebound a bit. And then you could get that back in line and probably even exceed your initial goal. If you can wait.
A good vehicle for doing this saving into low cost index funds. You can buy these funds directly from a mutual fund company or open a brokerage account Another option is Betterment. They invest your savings in low cost index funds that track an entire stock and bond market, just tell them what percentage to invest in stocks and what percentage to invest in bonds. Vanguard has Life Strategy Family Funds look at how much time you have until you need your savings, then invest in mutual funds for you.
I hope you’ve enjoyed my podcasts on funding a gap. I’d love to hear about your dreams for a transition or gap and how you will save for it. If you’d like some help with the planning reach out for a free consultation. I love helping you live your dream life.
I had a great time on Monday as a guest on Lacey Lankford’s Live Youtube broadcast for the Military Appreciation Month where we discussed how to save. I you missed it, catch the recording here:
https://www.youtube.com/watch?v=_gV43N02HSk
Lacey also has great resources on her website:
https://laceylangford.com/
Lacey's podcast The Military Money Show:
https://laceylangford.com/podcast/
Today I thought we'd talk about gaps in life. I love doing all kinds of financial planning with my clients both long and short term, and everything in between. A simple way to think about life planning is like its a one act play. The whole of your life is on the same stage, it's got one set of actors, and these actors come in and out of the story. It has a cohesive plot from start to finish. This linear one act play makes planning a lot easier. But you know, a whole lifetime is rarely that simple.
Instead, you may think of your life as more of a novel. Each chapter has its own sub plot. For a long life, a novel may seem like a better way to look at it all and use for planning your finances. Chapters might be joining the military or your first job. There may be chapters for marriage, children, second career, retirement, and so on. A cohesive story that flows seamlessly from one chapter to another.
But I find, especially with military, life isn't really like a play or a novel. I like to think of it more like a library where as you go through life you may be choosing a book or two at a time. You may have a favorite genre, or theme in life for a while. And then lay that book down to pick something else up. Anything's possible in a library, especially a big library with a lot of choices. If you're trying to plan for a financial life that is more like a library, its more challenging. Knowing how to save, for what, and when is more complicated. But it also provides you with more options, with you in charge. I think one of the most challenging times when your life is a library is the transition. That time between books.
So the big question is how to approach those gaps. They maybe planned, or not. You could be forced out of the military or a career. Maybe you thought you’d make a long career where you are now, but things change and you need or really want something else. A good emergency fund will help you cover life’s costs in an unexpected gap. But if you can anticipate a gap, you can plan for it and have a smoother transition. Rather than just grasping for the first book you can reach when you enter the library. A planned gap can give you time and space to reset, think about the life would you really like to next, and find a choice you’ll love.
I’ve seen more than one servicemember do a “seemless” transition. They go right into full retirement or have a second career laid out before leaving and start their new job immediately. They PCS the family, invest in a new wardrobe, and dive into the next big book. Only to find out the new phase isn’t what they thought it would be. It’s not the life they thought they would love. So they either gut it out or transition again.
If you have the time and resources, you may consider planning for some gap time to decompress and explore a little. Maybe you’d like to go back to school on the GI bill to start a different career that excites you. You could plan and save for that gap. Maybe you intern somewhere, or work part-time to test drive something new. Or maybe you really could use a mental break and just do something for you and your family for a little bit. Planning and saving for for a gap before your next transition is worth considering. Next week we’ll talk more details of what to consider, and how to plan and save for a gap.
Today we're going to talk about what age to retire if you're a FERS federal employee. There are several key ages to consider. The first is when will you reach your minimum retirement age (MRA). Depending on when you were born your MRA is from 55 to 57 years old. If you have at least 30 years of service, you can retire at your FRA and start receiving your pension immediately. If you have more than 20 years but less than 30, you are eligible for a full pension, but you won’t begin get your first pension payments until you are 60 years. If you have 10 to 29 years federal service, you are eligible for a retirement at your full retirement age, but your pension payments will be permanently reduced. This means you’ll have a gap where you won’t have your federal salary or a pension for a few years. Or you could retire early and start a pension immediately, but you payments will be permanently lower.
The next key age is what we call the “magic 62”. You'd be eligible to begin receiving your Social Security at age 62. I don't usually recommend you do that. But it's an option, it gives you flexibility if you need it added income right away. In general, your Social Security full retirement age is between age 65 and 67, depending on when you were born. That’s about 10 years after your FERS minimum retirement age. Retire before you Social Security full retirement age and you will get a permanently reduced benefit. On the other hand, if wait until you are 70 to start Social Security you will get 8% more in your paycheck for each year past full retirement age.
Another reason to wait until at least magic 62 to start your FERS retirement is a boost to your FERS pension. If you're a FERS employee with more than 20, but less than 30 years of service, you get an extra bonus by waiting to 62. Your yearly pension is calculated by multiplying your average high-three yearly salary, times 1%, times your years of service. But if you wait until you're at least age 62, with 20 years or more of service, you use 1.1% in the formula instead of the 1%. Y
Another great benefit of waiting to age 62 is that's that’s the age when your regular FERS retiree Cost of Living Allowances (COLA) begin. COLA is a yearly automatic increase in your retirement pension based on inflation. If you retire before age 62, you miss out on those COLAs. The buying power of your pension will go down because of inflation until age 62. You never get a catchup for those years.So again, getting that COLA boost every year right from the start is another plus for waiting till you're age 62.
All right. Now there also are general benefits of retiring later. The longer you work, the better off you are financially, because you're saving longer, earning a higher FERS and Social Security pension, and putting off spending your retirement savings until you're older. It helps you build a cushion.
And, of course, there's the Thrift Savings Plan. You FERS employees are getting that 1% contribtion from Uncle Sam no matter what. And then if you're contributing to TSP you get up to a 5% salary match. If you're contributing the max $26,000 a year when you’re 50 or older, with your match, that's an extra $31,000 a year in TSP for every extra year you work, and that can add up fast as well.
So in deciding when to retire, are you enjoying your work, how’s your health, and how much do you need for a pension to have the retirement that you want. You can run the numbers and find the best plan for you. Look at your possible income sources like your federal pensions, Social Security, and Thrift Savings Plan and the costs and benefits of tapping each one at different ages. Everybody's situation is unique. But it’s good to remember and consider the benefits of that waiting until your are 62 or later to start retirement.
Today were going to talk about rebalancing. An investment portfolio is a group of assets you own. Ideally you have plan based on what you want that money for, when you need it, and how much risk you are willing to take in order to grow your investment. This investment plan typically includes asset allocation, which is the balance of different types investments you plan to use to achieve your goals. Invest according to your plan and you can think of your investment portfolio as “in balance”.
There are two main things that can throw your investment allocation out of balance. First, your needs and goals may change and you realize your original allocation plan doesn’t fit your new situation. You may discover you need a different portfolio allocation than you have now. You are out of balance.
One of the most common ways a good asset allocation gets out of balance is when one asset grows faster than another. Investment allocation is done by percentages. Let’s say based on your specific needs and tolerance for risk, you set your asset allocation at 50% of your investment dollars in a US Stocks, 25% in an International Stocks, and 25% in a US Bonds. Over time as your some investments grow faster than others, your allocation may drift to 55% invested US stocks, 25% International stocks, and 20% in bonds. To get back in balance, you would sell enough of your US stocks and using that to buy more bonds to bring your asset allocation back to your specific goal of 50/25/25. Keeping your risk at a level appropriate for you is the biggest benefit. Periodic rebalancing may also you earn a higher overall return. You’re selling relative winners to buy losers. And in this way you are following the mantra of successful investing – buy low and sell high.
One of the easiest ways to is to invest in a target date fund, or if your in the Thrift Savings Plan, TSP Lifecycle Funds. Typically set up in retirement accounts, all you do is choose a fund that matches the year you plan to retire. Everyone’s investment in the fund will be allocated as part of a set plan, depending on how much time you have left to retirement. The fund will do the rebalancing for you to keep your asset allocation on target. The target date fund will also gradually shift you from a relatively risky allocation to less risky allocation percentages over time.
Or you can rebalance yourself. With TSP you just is enter in your desired asset allocation percentages and TSP will do the rest. Outside TSP you may need to do some math to figure how much in dollars you need to buy and sell to get back to your target percentage. Some companies offer rebalancing tools to help you. Some offer mutual funds that maintain set asset allocations and rebalance automatically for you. Financial advisors can also help with this.
Beware, there may be tax consequences. First, if you rebalance inside a retirement account like IRAs, TSP, and 401k you don’t pay any taxes on these trades until you pull the money out, usually in retirement. But if you are rebalancing a taxable investment account, you will owe capital gains tax on investments you sell. It’s a good time to go back and listen to Episode 44 of my podcast on Capital Gains Tax. And watch the Wash Sale tax rule. It’s a bit complicated, but in general if you buy and sell the same, or nearly identical, asset within 30 days, it is also not taxed favorably. Rebalancing less often will help you avoid this altogether. And epending on where you invest, you may have to pay fees when you buy and sell. The costs can mount up.
How often? Setting time, like yearly is simplest. A second method is using tolerance bands. You do nothing when your investment allocation varies within a set range or band, like guardrails. If one asset gets out of bounds, it’s time to rebalance. This helps minimize unnecessary trading, but does require you to monitor your investments regularly.
Profits on investments can be taxed as regular income or at a lower long-term capital gains tax rate. Capital assets are things you buy, hold, and then sell, like stocks, bonds, mutual funds, Exchange Traded Funds (ETF), collectibles, and real estate property. Its increase in value is called gain. Capital gains are taxed when they are sold. You calculate gain by subtracting what you paid, called basis, from what you sell it for. To be long term you have to hold it for one year or more. If you buy a capital asset l, hold it for one year or more, then sell it for more than you paid for it, you have a long-term capital gain. You will owe tax on it, but the tax rate you pay will be lower than regular income tax.
Long term capital gains (LTCG) are taxed at 0%, 15%, and 20%. In 2020, if your total income was up to $40,000 if you’re single, or $80,000 MFJ your LTCG are taxed at 0%! Over that up to $400,000 plus you’re LTCG will be taxed at 15%. If you are expecting a drop in income that would put you in the 0% LTCG tax bracket, like taking some time off from work after transitioning out of the military, retiring early before you are eligible for a pension or social security, or are between jobs, this may be a good time to realize a LTCG. If you sell while you are in the 0% LTCG bracket, you pay no tax on it. You can reinvest it in something else and reset your basis, paying less tax overall than if you let that initial investment ride. Even if you won’t be in the 0% LTCG bracket, the LTCG rate is always lower than your federal income tax bracket, with a couple of exceptions that I’ll cover below.
Here are a few things that are NOT long-term capital gains. Regular dividends and interest from investments you own are taxed as regular income. If you sell an asset you held for less than one year, it is a short-term capital gain and will be also taxed at your higher regular income rate.
If you sell an asset for less than you paid for it, it is a capital loss. You can subtract your losses from your gains in the same year to determine your tax. If you have an overall gain, you pay tax on the difference. If you have an overall loss of, you can deduct up to $3,000 of it from your regular taxable income. The rest of your losses have to be “carried over” to the next year.
A special category is the sale of a your home. Up to $250,000 of gain if you are single, $500,000 of gain if married is not taxed if you lived in your home for 2 of the last 5 years before you sold it. Our military can have up to 10 years to meet the requirement if you PCS . And federal employees suspend the 5-year clock while they on government orders overseas . .
There’s not enough time today to go into the sale of a rental property which is also subject to LTCG tax. But know that improvements to the property are added to basis. And when sold you will pay a special 25% capital gains tax on all the depreciation deducted from your taxes over the years, called unrecaptured depreciation.
The last special rule is the LTCG rate for some assets are taxed at a flat 28% , no matter your income . This includes collectibles like art, stamps, coins, cards, comics, other rare items, and antiques, as well as precious metals in any form. If you are a high earner in the 32%, 35%, 37% income tax brackets, the LTCG tax rate of “just” 28% is still a good deal. But for most Americans, the 28% LTCG rate for this special category of assets is HIGHER than your regular income tax rate.
Lastly, keep detailed records of how much you pay for your assets. If you are buying and selling assets with a broker-dealer, bank, or mutual fund they will issue you a FORM 1099-B each year that will list the sales details and basis and you just plug that into your tax return
IRS Topic No. 409 Capital Gains and Losses https://www.irs.gov/taxtopics/tc409
In Episode 39 Stash the Cash we talked about different cash accounts you can use for short term savings goals, like savings accounts, CDs, and money market accounts. Today, we’ll ask What Account Should I Consider If I Want To Save More. I put a free, handy checklist that you can download from my website at www.moneypilotadvisor.com.
Healthcare savings plans offered by employers. These aren't available to our military service members insured with TRICARE. These special savings accounts allow you to put pre-tax dollars in them directly from your pay check. And as long as you use the funds to pay eligible medical expenses, you won’t pay tax on the money when you draw it out either. With the Flexible Savings Account (FSA) you and your employer can make contributions. But remember to spend the money in your FSA each year because you can't carry it over.
Health Savings Account (HSA) You can only use one if you have a high deductible health plan. Again, not available with TRICARE. Many civilian employers and FEHB do offer them. It is like an FSA but you can carry over your balance from year to year. If you still have money in your HSA at age 65, you can withdraw it for any reason tax free. It's the Triple Crown of tax free. Consider keeping at least that max out-of-pocket amount in your HSA and/or emergency savings to cover you if you have a big expense.
Retirement savings accounts like a 401(k), 403(b), or the Thrift Savings Plan (TSP). Contribute enough to max out any match offered by your employer. For FERS employees and BRS military service members that's at least 5% of your pay. CSRS feds and non-BRS military don’t get a match. Everyone else check with your employer.
Everyone with earned income contribute to an Individual Retirement Account (IRA) and if you’re a couple with only one income, you can still save up to the max for each of you. This is a great way for a non-working spouse to build up retirement savings. There are regular r and ROTH IRAs. There’s a lot to it. Learn more in my Podcast Episodes 28, 29, and 30 .
529 College Savings Plans. 529s are offered by almost every state. Withdrawals are tax-free if used for qualified education expenses. And you can change always the beneficiary if needed. Many states also offer other incentives that sweeten the 529 pot so it's worth checking out the details for your state.
Tax Deferred Insurance either an annuity ora cash value life insurance policy, like whole life or universal life Insurance. I feel like both of these though should come with a warning label. They're not necessarily bad saving vehicles. But they often offer large commissions to the agent that sells them and all too often our sold to people when they are not appropriate. So if you're considering an annuity or cash value life insurance, this would be a great time to get a second professional opinion from a financial planner to see if other savings vehicles and or cheaper term life insurance may better fit your particular needs.
Lastly, consider a taxable brokerage account. Generally, you can take your money and use it when and where you want without a penalty. These accounts are good if you are willing to take some risk, plan to leave the money there for at least a year, and want would like to earn more return than cash accounts. Setting up these accounts doesn't have to be intimidating. You can usually set up an account online with a low fee mutual fund company like Vanguard, or Betterment which helps you invest in low cost ETFs. Even bigger name brokerage houses like Charles Schwab have some simple, low fee options. If you want someone else to handle it all for you or advice on what to invest in, this is another good time to call on a fee-only financial planner or advisor.
Today I thought we'd talk about post-COVID spending and savings habits. An article popped up in my inbox this week by Samantha Lamas, a content author at Morningstar on this topic. I'll put a link to the article in the show notes. We'll take a look her thoughts and see how they can help us maintain some of the good habits we may have developed during the COVID restrictions. COVID may have helped you build some good money habits Now, as restrictions are being lifting, ti may be some of us ditch good new habits, and go back to spending more and saving less again.
As Samantha pointed out, making a new habit stick depends on how difficult is it to maintain better behavior, what’s your environment, and what incentive is there to maintain the new behavior? During the pandemic, COVID restrictions acted as sort of environmental fix where you were shielded from temptations of overspending at, in-person settings. Not being able to spend as much, no matter how much you missed it, may have helped you save money during COVID for other goals that are also important to you.
If you who would like to continue curb your spending and build your savings, there's three areas to explore. Identify the good behaviors you've picked up during the past year. Write down those you'd like to stick with in the future and why this is good for you. You’re What and you’re Why. If you like to stay in shape and go to sports events with friends and saved money on gym membership because it’s closed, you’re exercising outside, and training at home. Would you like to continue that money saving habit? Skip the gym membership and use that money to buy tickets to a few games . Link that healthy, free exercise habit you want to maintain to the goal of attending some sporting events with friends again. T
The second step is to prepare. It's important to acknowledge that this COVID environment may have helped us stick to our new spending and savings habits. Try to think what's important to you about these behaviors you want to curb. Then come up with a new strategy to meet those needs .Say you enjoyed going out and eating with friends fefore and didn't mind spending on an expensive dinner,you really enjoyed it. But you would like to save for another priority. Thiink about what it is you really loved about that dinner out? What need does that meet for you? Is it the food itself? The service? Or was it you just really enjoy spending time with your friends? If its seeing friends, maybe get together just as often, but at budget friendly restaurants or invite friends over for a home cooked meal instead. Is it the food and atmosphere you love? Maybe you enjoy that experience a little less often in order to save for something else.
Okay, so third thing mentioned in the Morningstar article is called the block to help prevent that is to literally create a barrier to the action you're trying to avoid. An example of a block, could be you implement a three-day wait rule, where you agree to wait for three-days before acting on a money decision. This might help you from making spontaneous purchases that you then have buyers regret about later and give you some breathing room to think about your Why.
And when you finally can get back out there again have fun and love life, with no regrets.
Some content from “How to Help Clients With Their Post-Pandemic Spending and Savings Plans”, Samantha Lamas, Apr 19, 2021, Samantha Lamas is a content author at Morningstar
https://www.morningstar.com/articles/1034108/how-to-help-clients-with-their-post-pandemic-spending-and-savings-plans?utm_medium=referral&utm_campaign=linkshare&utm_source=link
Inflation makes things you buy cost more. That dollar buys you less than it did before. Of course, if your income grows as fast as inflation, you won’t feel the pinch. Our active duty military and federal employees get yearly adjustments to your pay based on the Consumer Price Index (CPI) which is one way of measuring inflation. This really helps the buying power of your paycheck keep up with rising prices or inflation. However, most of our other listeners don’t receive automatic boosts to their pay check. Eventually pay often catches up, but you’ll feel that lag where your pay doesn’t buy what it used to.
Inflation can hit retirees especially hard. Traditional pensions from companies are often set when you retire, and remain the same amount the rest of your life. If you enjoy a long life, that set monthly payment will cover less and less of your daily needs as time goes on.
When military retire from active duty you continue to get yearly Cost of Living Adjustments (COLA). This is HUGE because most military retire in your 40s and 50s and odds are you will live another 40 years or more. You CSRS federal employees will also get yearly automatic COLA . Unfortunately, FERS employees get what I call diet-COLA. With diet COLA you get a full COLA for inflation up to 2%. When inflation for the year is between 2 and 3%, you COLA is fixed at lower 2%. For years where inflation is 3% or higher you receive the CPI minus 1%. So if inflation is 3.5% your COLA would be 2.5% that year. This isn’t horrible, but you will see a gradual erosion of your retirement pay buying power over time.
So what to do? Try to continue to increase you pay faster than inflation while you are still working. If you are covered under a pension, this will help you receive a higher pension when you retire. Higher pay will give you more opportunity to save and invest for retirement. Also invest your long-term savings in a way that will grow faster than inflation, increasing you future buying power. The G Fund which is an investment option available to military and federal employees in their Thrift Savings Plan, which is like a workplace 401k. The G fund is guaranteed not to lose money and is considered the “safest” place to invest your TSP dollars. Your 401k plan may have a similar short-term government bond option. But calling them safe doesn’t really tell the whole story. You won’t lose money, but it is not guaranteed to keep up with inflation And the power of those savings may not keep up with rising costs of what retirees spend on, especially healthcare and medicine.
Taking some calculated risk in hopes of being rewarded with more growth over time can help. That means investing at least some of you retirement funds in stocks and/or bonds issued by companies. These investments are more risky. Their value swings much higher, and lower than those “safe” investments. If you have to cash out when the market is down , you can lose money. But saving money in a well-diversified selection of investments can help smooth the roller coaster a little and in the long run has a higher probably of beating inflation and maintaining your buying power down the road.
Alright at the beginning of the podcast I mentioned that inflation can be both good and bad. If you have a long term loan, like a mortgage and there s inflation, the dollars you pay the loan back with in later years are worth less than the dollar in you pocket now. Your lender feels the inflation pinch instead of you. This can be a double benefit of refinancing your mortgage when interest rates are very low, like they are right now. Inflation is also very low right now. But with a fixed rate mortgage, the interest rate you pay on the loan will stay that low rate. But inflation is not fixed. If inflation raises during the life of your loan, which could be decades, you will be paying it back with cheaper dollars.
Withholding estimator https://www.irs.gov/individuals/tax-withholding-estimator
Written instructions How to Use the IRS W4 Tax Witholding Estimator
Step-by-step video https://www.youtube.com/watch?v=1AidmxJ1O9U
MyPay website (feds and military submit Form W-4 here) https://mypay.dfas.mil/
Well today we’ll talk about how we determine withholding, and more importantly we’ll talk about how to do your withholding right. First, what is withholding? Federal taxpayers, like you and me, are required to pay income tax throughout the year on our taxable income. If you earn a paycheck working for an employer like a business or the government, they are required to withhold federal income tax from your pay and submit it to the IRS on your behalf. They use the IRS Form W-4, Employee's Withholding Certificate. Your employer usually fills out the W-4 automatically and has you sign it when you first start work. This mandatory withholding only applies to income you earn from an employer and pensions. If you are self-employed, earn money as a contractor that is reported on a Form 1099, earned interest on bank accounts, have rental income or other business income, or have dividends or capital gains from investments, you need know that there is no automatic income tax withholding for this income. You still OWE tax on it. But no one else will withhold it for you.
You are required to submit those taxes either by submitting them yourself quarterly directly to the IRS or you can have extra income taxes withheld from you paycheck with your employer. You can have that extra tax withheld each pay period by filing an updated Form W-4.
Most of you who are single with income almost entirely from a paycheck will find that the automatic W-4 that your employer provided does a pretty good job of withholding. What we are finding are these automatic W-4’s are now coming up short if you have more than one job, if you’re a couple with very different incomes, or if you’re couple with more than two or jobs or other sources of income.
Before you start the IRS’s new online W-2 tax withholding estimator, pull together your and you spouse's most recent pay statements or leave and earnings statements. Gather information for other sources of income you may have, including rental property, interest on savings, or dividends and capital gains from taxable investments. A great place to start is your 2020 income tax return. And make adjustments for changes you expect in 2021. I highly recommend you watch the IRS step-by-step tutorial video on how to use it before you start.
To locate just the amount of your government or military pay that is taxable, look on your LES in the section called Federal Tax. In that box you should see wages this period and wages year to date. You’ll need both numbers. To calculate you annual taxable income, multiply your wages this period by the number of pay periods in the year. The estimator will also ask for your wages to date and federal tax withheld year to date. Both are also found in that federal tax section of our LES.
Print out the info from the estimator and use the results to complete a new Form W-4, Employee's Withholding Certificate. Then submit the completed Form W-4 to your employer. All military members, military retirees and federal civilian employees using myPay can update their IRS Form W-4 on line at myPay.
If you have any feedback or would like to have you question answered on a future podcast, you can always reach me through my website moneypilotadvisor.com. Talk with you next week.
20210330 Stash the Cash
Hello and welcome back to the podcast. Often in financial planning, we are planning for the future and managing finances can help you make that dream future a reality. But sometimes you have a need or goal and you’ll need pay for relatively soon, like in the next year or so? This may be for a house down payment, next year’s tuition, or to cover a gap in income while you take time off to care care of a newborn or right after retirement.
If you’ve got more than pocket change your saving, I recommend a bank. You don’t trust a bank? The Federal Deposit Insurance Corporation (FDIC) insures your deposits up to $250,000 per FDIC-insured bank per person per ownership category. It covers checking and savings accounts, CDs, money market accounts. Single accounts and joint accounts are separate ownership categories. More details at the FDIC. https://www.fdic.gov/deposit/covered/categories.html You can split the money among more than one FDIC insured bank. Your deposits are insured up to the limit at each bank.
Checking accounts provide quick easy access to your money . Savings accounts usually pay more interest but have a limit of six withdrawals per month by law. There are exceptions, and withdrawals and deposits can be for any amount.
Would like to earn more interest? Then Certificates of Deposit (CD) or a Money Market Account may be for you. CDs are offered provide a specific interest rate in exchange for you agreeing to leave a lump-sum deposit with them untouched for a set amount of time. At the end of the term they return your deposit with the interest to you. CDs are a good option when you know when you may need a set amount of money. You can count on the guaranteed interest. Match the amount of the deposit and time to withdrawal to your future need.
Money Market Accounts are also offered by banks and credit unions, and generally pay higher interest rates than savings accounts. They often come with debit cards and check writing privileges similar to a checking account, but like savings accounts you are limited on the number of withdrawal you can make each month. If you think interests rates may rise, the money market account may earn more than a long term CD. If you think interest rates will fall, locking in a set interest rate with a CD may be better.
On thing I really want to stress here is that a Money Market Account and a Money Market Fund are NOT the same. A money market fund is an investment sponsored by an investment fund company. There is no guarantee of principal, that means you can lose money you deposit with them. And they are not insured by the FDIC.
For all these accounts, shop around. The interest rates offered by different banks and credit unions vary widely. Check out online banks. Because they don’t have costs like a brick and mortar bank, they often offer some of the highest interest rates. And some may offer incentives, or special features. If you have more to deposit than the $250,000 FDIC per person, per account limit, considering splitting up your deposit between more than one bank or credit union. And remember you’re not going to get rich on the interest these accounts earn and it will likely not even keep up with inflation, so they are not very good long term investments. The ARE safe places to stash your cash so that you can be sure that it is available when you need, no gut wrenching roller coaster ride.
Hi everyone and welcome to tax season. A few days ago, the Internal Revenue Service announced that the federal income tax filing due date for individual 2020 returns and payment of income tax has been automatically extended from April 15 to May 17, 2021.
You get an extra month to file and pay your federal income tax. They are now both due on May 15. But this does NOT mean that your State income tax filing deadline is automatically extended (if you’re state has an income tax). Some states already have deadlines later than May 17, and MAY not be affected. The rest of the states are deciding what to do and have been making announcements. California, Virginia, North and South Carolina, are among the states that have already extended their deadlines to May 17th and more are making the decision. Check with your state for the latest specifics. The states I mentioned have also said the deadline to pay the state income tax was also extended, but don’t assume that is true for all states. Double check.
In another late minute change, if you received unemployment income in 2020 and your AGI was below $150,000 , you won’t pay federal income tax on the first $10,200 of unemployment you received. If this affects you, but you have already filed your 2020 tax return, do not file an amended return just for that. The IRS put out guidance that they will re-figure your taxes using the excluded unemployment amount and adjust your account accordingly. The IRS will send any refund amount directly to you.
If this affects you, you haven’t filed yet, and you live in a state with a state income tax, may want to wait a few days or a week. Tax preparation software is rapidly catching up with the states’ changes as they are announced. But we noticed an anomaly on Saturday in the in software we use where the fix for the federal returns, inadvertently caused an error in the calculation of the state return. If you are doing your own tax prep, give the software a bit of time to make the changes and be sure to update it the software before you send in your electronic return. If you use a tax preparer they should be on top of this already.
Should you wait until May 17 to file? if you don’t have a compelling reason to put it off and you are expecting a refund filing sooner will mean you get your refund faster.
Even with the extensions to file your federal tax return, will you be unable to pay your taxes on time? FILE anyway. Remember the penalty for failure to PAY your taxes is 0.5% per month plus interest. The penalty for failure to FILE by the extended deadline is 5% per month. Yes the penalty for not filing on time is 10 times more than the penalty for not paying your on time.
Do you have special circumstances and you can’t file on time? No problem, before the new May 15 deadline, file for an extension with IRS FORM 4868. Individual taxpayers can request a penalty free-extension before the filing deadline and then actually file your return by October 15. But understand the deadline to pay your taxes will not be extended past the May 17. And again if your state has an income tax, check with your state for any special rules or extensions.
One special note, especially for our listeners who pay quarterly estimated taxes. Your 2021 estimated tax payments did NOT get an extension. If you're required to make estimated quarterly tax payments to the IRS because you are self-employed, have rental property, or have investment income or other reasons, you still need to make those payments at the normal times which is still April 15 for 1st quarter 2021 and June 15 for the second quarter payments. This is different than last year when they were extended. So remember get those estimated 1st quarter payments in by 15 April as normal.
Hope this has cleared the air a bit and we’ll speak with you next time.
Hi and welcome back to the podcast. I’m so glad to let everybody know that last week I passed the Certified Financial Planner exam. It’s been a long road and I spent most the last few months studying nonstop. It feels great to get my life back and catch up on work. Thank you so much to all you out there – my husband Rob, family, my friends and especially clients. Your support and encouragement made all the difference. And I’m really excited to put all this hard work to good use and provide the best, fiduciary financial planning advice for you everyday.
Today I thought I share some my favorite financial resources with you, like websites and podcasts. Check out my Money Pilot Financial Advisor podcast. It comes out weekly and I try to tackle wide variety of financial topics with plain English in easy to chew 10-15 minute episodes. This is the 37th episode, so you can go back and listen to previous shows that pique your interest. You can subscribe on most popular podcast apps or go to my host site at buzzsprout.com
https://www.buzzsprout.com/934996
Another one of my favorite podcasts is The Military Money Show with host Lacey Langford. Lacey is an Army brat, military wife and veteran and tackles the financial craziness military life with expertise and a big dollop of humor. Her podcast runs weekly and always has great guests. I always laugh and learn something. Dial in, have fun, and get great military life coping hacks.
https://laceylangford.com/podcast/
Looking for reading material, too? Here area few websites I often use. Websites:
For my military listeners out there your first stop should be the MilitaryOneSource.mil Financial and Legal page. There’s lots of detailed information on where to go for help on post, online, even by phone or from overseas.
https://www.militaryonesource.mil/financial-legal/
For military and government employees, serving or retired, the TSP.gov website is your authoritative source for your Thrift Savings Plan. And if you go to TSP.gov/forms they’ve got great, detailed booklets and fact sheets about all things TSP that you can download.
https://www.tsp.gov/
https://www.tsp.gov/forms/
I recommend all my federal employees out there check out FEDweek.com. They have great information on federal employee benefits, retirement, financial information and more. They published some fantastic handbooks that you can buy on their website. I keep copies of their handbooks on my desk.
https://www.fedweek.com/
https://www.fedweek.com/store/
If you are a military member looking to go the extra step and hire a professional a financial advisor who understands military life, check out the Military Financial Advisors Association. This group believes military and veteran families deserve access to genuine, affordable, fiduciary financial advice. They have a Meet Our Advisors page where you can browse different profiles to find advisors to contact and interview for your best fit. I’m proud to say I’m a member of MFAA.
http://militaryfinancialadvisors.org/
The XY Planning Network.has a great Personal Finance blog and a Find an Advisor page as well. Like MFAA, they have an open door and welcome you no matter where you are in life or how much you’ve saved.
https://www.xyplanningnetwork.com/
https://blog.xyplanningnetwork.com/consumer-blog
Today I thought I’d talk a bit about where you can get financial advice and financial planning. Are your major concerns right now short term or do you have fundamental questions like how to meet your day to day needs or in a financial crisis? Do your want help creating a budget, or paying off credit card debt. You may find a financial counselor really helpful. If you’re a servicemember you may have financial counseling available right on post. You can also access confidential financial counseling from anywhere through the MilitaryOneSource website. https://www.militaryonesource.mil/confidential-help/interactive-tools-services/financial-counseling/ These trained professionals can answer questions, and also refer you to other services or programs that may help. And anyone can request help from an accredited counselor through the Association for Financial Counseling & Planning Education. https://www.yellowribbonnetwork.org/covid-19
If you want more help getting started and keeping motivated to save for your goals, reduce debt, and learn more about finances in general, you may find financial coaching useful. This really is the wild west and coaches may go by titles like money coach, financial life coach, certified money coach, more. Their focus is on motivating and educating. This field is mostly unlicensed and their advice is typically generalized to fit most people. Coaching can be a great way to get started and help with implementing, especially if you are looking for help for the first time. Coaches may have a background in other fields that make them good teachers and motivators. They may not have much specific financial training.
When you want or need specific advice and help with a range of financial areas, like taxes, retirement saving and investing, forming a business, investing in real estate, paying for education, balancing debt, insurance and more, a financial planner is your go to person. The gold standard for this is a Certified Financial Planner. Their work and advice i focuses on the interactions of many areas and help you identify your financial goals, develop options, form a plan, and implement the steps of the plan. Then work with you to make adjustments and adapt as your life situation evolves.
Several associations have great information and list member profiles you can browse with links to their websites. The Military Financial Advisor Association has planners with in depth knowledge of military life and benefits. Several like me also work with federal employees. http://militaryfinancialadvisors.org/about/
XY Planning Network members are dedicated to providing advice regardless of your age or assets, especially those of you in your working, not-yet-wealthy years. https://www.xyplanningnetwork.com/
The Garrett Planning Network specializes in providing planning by the hour. One of their members may be good choice if you only want to commit to a short time initially, or more want limited planning. https://www.garrettplanningnetwork.com/
And you can check out the National Association of Personal Financial Advisors (or NAPFA). https://www.napfa.org/find-an-advisor#
When you meet an advisor or planner they should be able to explain things in a way you understand. Part of a planner’s job is education, but you should never feel you are being talked down to, pushed around, or ignored. There are more fish in the sea. Your experience and results are best when you feel comfortable and understood.
Hello and welcome back to the podcast. Today we’ll be talking about umbrella insurance. I’m sure you’re familiar with auto insurance, home insurance, health insurance, maybe even travel insurance. But you may be wondering why on earth you would need to insure an umbrella. Well umbrella insurance doesn’t really insure umbrellas. It gets its name because it offers extra protection and sits on over of other insurance coverages you already have. Umbrella insurance is also called excess liability or personal liability insurance. It’s there to protect you from the financial fallout of a really a large claim or lawsuit. For example, if you unintentionally cause a car accident, or someone is hurt on your property and the claims are higher than your auto or homeowner’s insurance coverage, umbrella insurance begins to pay after your other insurance is exhausted.
Why is this important? An umbrella policy protects your existing personal assets (what you own) and even future assets like wages from being taken away to pay the cost of losing a lawsuit over a car accident or an accident on your property. Lose a lawsuit like that and you could have to pay the winning party for medical expenses, legal costs, and lost wages, which can become really expensive really fast.
You don't have to be wealthy to benefit from an umbrella policy. Even if you don't own much now your wages could still be garnished. Now, if you are young, you don’t own a home, and don’t have much savings, you may not need umbrella insurance. The auto and renter’s insurance you have may be adequate to cover you. But the more you have (or the more someone thinks you will earn), the more you can lose, and the more likely you are to be the target of a lawsuit.
WHAT you have or HOW you live your life may also increase your chances of being sued. Like having a swimming pool or trampoline. If you have pets that could cause injury like dogs, horses or other large animals. Do you like to host large parties at your house? Drive during rush hour, when drivers are more likely to get into an accident. Coach youth sports?
If you own rental property you are also at higher risk and should have umbrella insurance. Your personal umbrella policy CAN provide you liability protection for accidents at rental property too. But you have to be sure it is included. For example, my umbrella policy will cover up to four rental properties before I need a commercial liability policy. Ask specifically what is covered when shopping around.
How does umbrella insurance work? An umbrella policy provides excess coverage above and beyond what your homeowners and auto insurance policies provide. Let's say your auto policy pays up to $300,000 of medical expenses per accident and your umbrella policy is for $1 million. If you are sued for $900,000 because of a car accident, your auto insurance would pay $300,000 and your umbrella policy would pay the remaining $600,000. Your legal expenses are covered as well. Umbrella policies usually provide $1 to $5 million of extra coverage. You choose the amount of coverage. One million dollars of coverage typically costs $150 to $300 per year.
When you shop for an umbrella policy, the insurer will require you to have a specific amount of liability coverage in your existing auto and homeowners’ policies. Remember umbrella insurance sits above you other insurance, it doesn’t replace it. It will only pay after you regular insurance has paid. Know those base requirements and increase your auto and homeowner liability limits if necessary. You may get a better price buying your umbrella insurance from the same company you have your home and auto insurance with, though its not required to be with the same company.
Now, umbrella insurance won’t cover your own injuries or damage to your own property. Your health insurance is for your medical expenses. Your homeowner’s insurance would cover your property from l
Today we’ll be talking about your Estate. That is what happens to you and your stuff when you die. Estate Planning plans for what happens to you when you are very sick, and your stuff when you die. At the top of the list is to put, in writing, what kind of end of life medical care you do or don’t want and who you want to make health care decisions for you if you can’t. This is an Advanced Medical Directive for Healthcare, also know as a Living Will. These forms are usually state specific. A good place to start is ask your healthcare provider or search online for your state government resources. My local hospital had the forms printed out, answered questions, and even notarized it for me. Military OneSource has a pamphlet available on line called Making Your Health Care Wishes Known Through an Advance Directive: A Guide for Active Military and Their Beneficiaries This is a great place to start for our military. It gives a great overview and points servicemembers to your supporting military Legal Assistance Office.
The next estate task is to name beneficiaries on your various financial accounts. This includes life insurance, bank accounts, and retirement accounts like an IRA, 401k and the Thrift Savings Plan (TSP). When you die, they will pretty quickly pay the beneficiaries you named, giving them much needed cash as soon as possible. These accounts don’t go through probate. Probate is the legal process done through the courts verifying that your will is legal and your intentions are carried out. Probate is also public, it takes time, and it costs money.
Another way for some of your assets to bypass probate and go directly to who you designate is by titling. You’re probably familiar with the title for your car. After you buy your car, you take the title the seller signed to the DMV to get plates and a new title in your name. Or in the name of you and someone else, usually a spouse. Two types of shared ownership which are called Joint Tenancy with a Right of Survivorship and Tenancy In Entirety pass directly to the surviving co-owner with out going through probate. These types of title are common for spouses who own property together like a house or a car. Using a title with survivorship rights means that person will get your share directly without the time, cost, and publicity of probate.
Probate will also occur when there you die without a will, this is called dying intestate. Without a will the probate court must decide how to distribute the assets of your estate to your loved ones, and anyone else who might try to lay claim to your stuff. So the next important estate tip to consider is have a will. If your single, no kids, not much stuff, it might not matter to you much. Have more assets? Married? Kids? You should have a will. A will tells the court where you want your assets that pass through probate to go. It’s also where you would tell the court who you would like to act as a guardian for under age children and provide funds to support them. Our military can get a will free from JAG legal services. Not sure where you supporting facility is, check at Military OneSource online. For you civilians, some workplaces offer legal services as a benefit, so that may be a resource. For very simple wills, you might consider an online will preparation service like Legal Zoom , Trust and Will or NOLO. Just be aware that these sites don’t actually provide legal advice. If you want to set up a trust to take care of minor children, have a blended family, want to disinherit an estranged family member, or have a life partner you aren’t married to, it is probably best to hire an actual lawyer to draft your will.
Our more recent podcasts have been kind of heavy on facts and figures. But let’s face it, we’re human, real people. I know what a healthy diet and lifestyle is, but what I’d REALLY like to do is wake up at noon and eat ice cream for the rest of the day. Managing our finances can feel that way too. So today we’ll talk about ways to set up your financial life so that you can make progress on your financial goals even when you don't feel like it.
The first step is daydreaming. Ask yourself, if I could have anything, time and money are no object, what would my ideal day be like? What would I do? Who would I do it with? From the moment you woke up till the end of the day, think it through and write it down. Then ask yourself, if I could have anything, but not everything, what would my day be like? What made the cut?
Naming what is important to you is the next step. Let’s go back to your happy day and give your wants and dreams names that mean something to you. It’s not a mortgage, maybe it’s your Home Sweet Home, or the cabin? Travel, meh. How about you name favorite beach, Disney, or Yellowstone? Retirement, really? Maybe you dream of the 9th Hole, breakfast in bed. You name it. Even your Emergency fund could probably have a better name, like safety net or soft landing. What do you want to be working and saving for? Bring up that vision in your head and give it a name that means something to you. The whole idea is that you work and save FOR something, not just because you have to or you should. Don’t get me wrong, maybe you need to or you should do something. But if you are working hard and saving, make it for something you can name and dream about.
Next step, start making it happen. One trick lots of people use, and I do myself, is to have separate pots of money for things. Let’s say you want a weekend away. Remember it’s not just a vacation. Name it. Dreaming of Nashville? Then get a jar or container and label it. Nashville, or Grand Ole Opry. Girlfriend Suzie lives there? Maybe your jar says Suzie Time. Put it in plain sight and each day before bed, put our leftover change in it. Thinking of Nashville? Give the jar a little shake. Remember your why. You can even count it out and see how much closer you are to your Nashville getaway.
Thinking, that’s quaint? Who even carries cash any more? You can do this electronically, too. Check with your bank about setting up multiple savings accounts. Many banks, including USAA and Navy Fed for our military, and online savings banks, do allow you to have multiple accounts and give them nick names. You can name your different accounts and transfer money from your direct deposit account, to the savings accounts. Usually you can even do this with a phone app. Starting small? Try transferring a few dollars every couple days. What’s even easier than the electronic “loose change goes in the jar” method? Automatic savings. Once you’ve named your accounts, you can make transfers from your paycheck to your special accounts. For example, USAA Bank has Savings Booster in their phone app. You can have $1 to $9 automatically transferred to a savings account 2 to 4 times a week. You can also set up automatic transfers to a savings account when regular deposits, like your pay, show up in your checking account. Ask your bank what savings programs they offer.
What’s great is you can check your balances online or in your app and see Suzie or the Cabin growing closer and closer to reality. Set milestones along the way. When you reach one give yourself a pat on the back, have a little mini-celebration. Just don’t rob the piggy bank to celebrate! For most of us, if we set money aside in a special place for something we can really see in our mind, we don’t miss that money as much. We get used to living day-to-day on what is left in the checking account. We make it work. And when we start to feel a little pain, then can give the jar a shake and dream.
Today we’ll talk a little about deciding when you need a trust and a few tips for getting one if you do.
A trust involves three parties. If you are setting up a trust, you are the trustor, also called the grantor. You and your lawyer draft up trust documents setting up the trust. Then you put some of your assets into the trust where the trustee now controls them. Your trustee is then duty bound to carry out your instructions for the benefit of the beneficiary. Wills are cheaper, easier to draft, and easier to change than trusts too. But a trust can give you control, through the trustee, during and AFTER death. For example if you are married for the second time and you have an adult son from your first marriage that struggles to to hold a job and make ends meet. You have been helping support him. If you don’t have a will, everything will go to your new wife. Your son won’t get anything. If you listed him as a beneficiary on an account, or did have a will leaving him an inheritance, he’d have money to help him survive. But your worried he’d waste it, leaving him with nothing. This may be a good case for a trust that would provide him regular but limited assistance like for health care or housing even after you die.
There are MANY different kinds of trusts. If you have a special need, there is likely a trust that would work for your situationIf you die owning a lot of assets, you may have to pay 40 percent federal estate tax. So many trusts are set up in part to minimize taxes. The current estate tax exemption to $11,580,000. Special needs children or disabled relatives may be another reason to look into a trust that would continue to provide for them after you die. And in general a blended family especially second marriages with children from a previous marriage and non-traditional families might consider trusts.
For example, die without a will or designated beneficiaries and your assets pass to your spouse if married or other relatives based on state law. Children you raised but didn’t adopt or an unmarried life partner might not get anything. Even with a will, others may contest your wishes in probate court after your death. Especially if other family members who would lose out didn’t approve of your life choices. That would be another reason to consider a trust.
In general, trust can be revocable or irrevocable. A revocable trust can be changed at any time and in any way during your lifetime, including totally revoking it. Theirrevocable trust cannot be changed or revoked after the trust agreement has been signed. Why would anyone give that up? Because it removes it from their estate so they won’t pay estate taxes on it.
Are you single or married with no kids, modest saving, you’re likely fine with just a will. If you have children the priority should be to designate in your will loving and willing guardians to care for them if you die prematurely. If you have assets or life insurance you plan to leave children, you might consider a trust to manage it while the children are still minors. If you have a blended family and want to be sure everyone is taken care of the way you intend. If or you want to disinherit someone or prevent them from benefiting from your death. You may also want to consider a trust.
Trusts are also more complicated and cost more to establish than a simple will. And trusts really need to be set up by a lawyer. How can you save some money if you are considering a trust? Know what you want to accomplish. Like I’ve said there are A LOT of trust options, and an estate attorney can help guide you through your decision.The more complicated your situation and the longer it takes, the more it will cost in attorney’s fees. Go in with a clear understanding of what your needs are or want to accomplish. The cost for a straight forward trust can be in the $1,500 to $3,000 range, it really varies. More complicated is more costly.
Step one, get organized and collect tax documents as they come in. You can expect tax documents from your employer, businesses you did work for as a contractor, former employer pensions, banks, investment accounts, mortgage company, charities you donated to, and schools you paid tuition to, to name a few.You may need to log into your accounts at these places and download the documents yourself.
Landlords, organize all the receipts for expenses, as well as rent collected. If you’re self employed, you’ll need to have income records and receipts for expenses. Parents and caregivers paying claining child or dependent care tax credit and will need receipts.
It’s expected that 90% of taxpayers will take the standard deduction this year, If you think you might itemize gather receipts compare that to the standard deduction. For medical, only the expenses that exceed 7.5% of your adjusted gross income are itemized. If you lost of income and had high medical expenses not covered by insurance due to COVID you may exceed the 7.5% threshold.
If you had property losses, you can itemize them if they occurred in a Federally declared disaster area. But he amount you can deduct is limited to our loss, minus insurance received, minus 10% of your income, and minus $100. Itemized deductions for state, local, and property taxes are limited to $10,000. Home mortgage interest and charitable gifts can still be itemized. If you refinanced to a lower interest rate, your mortgage deduction will be lower.
The IRS has a great tool called the Interactive Tax Assistant (ITA) to get answers to many questions based on your individual circumstances. https://www.irs.gov/help/ita
For active duty, guard, and reserve military check out Military One Source’s MilTax. for information, where to get help with your taxes even from overseas, and efree, tax preparation software available online. https://www.militaryonesource.mil/financial-legal/tax-resource-center/miltax-military-tax-services/
A great resource our nonmilitary is the IRS's Volunteer Income Tax Assistance (VITA). They prepare tax returns free for people who make $57,000 or less, persons with disabilities; and limited English-speaking taxpayers. https://www.irs.gov/individuals/free-tax-return-preparation-for-qualifying-taxpayers
Another great resource for free tax filing is the IRS Free File. The IRS’s partnered with tax prep companies to provide access to free online income taxes filing, if your adjusted gross income or AGI is $72,000 or less. https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free
There are also paid tax return programs online with different levels of support and prices like TurboTax, Tax Slayer, or H&R Block. Costs vary with most under $130 for federal and state taxes.
If this is your first time filing with rental property income, you sold property, own a small business, may itemize your taxes, or had a big life event in 2020 do extra research, or hire someone to help with your taxes. Cost depends on how complicated your taxes are and where you live. The average is $150 to $450. Enrolled Agents and Certified Public Accountants have specialized training, expertise, and can represent you before the IRS if were necessary. Contact them early and have all the documents they will need together and organized.
The tax filing deadline is April 15. If you can’t file by then, request an extension to file and pay any tax due by April 15 to avoid a late penalty.
Welcome to Part three of our introduction to Roth. Today we wrap it up and look at some things to consider before you pop the question to a Roth. The fundamental question to ask yourself is “Will I make more income in retirement than I do now?” With Roth you pay income taxes now. Then you don’t pay any tax on what that money earns, forever. General wisdom is that most people have less income and will be in a lower tax bracket in retirement. If this is you, investing in a Traditional account now is better, not Roth. Overall, you pay less income tax and have more savings left to live your best retirement life. So let’s do some brainstorming and see if this fits you.
Are you new to the work force? You're probably not earning much. If you stay in until you are eligible for a pension, your retirement pay will be a percentage of the salary you earn in last few years of your career. You will also be getting Social Security, and have Traditional TSP withdrawals to pay tax on as well. So less income now than in retirement is a good candidate for a Roth. But if money is tight, you may not have the cash to pay the higher tax bill. If you are a FERS employee or BRS military you get a TSP matching contributions of up to 5% of your pay. Prioritize getting to that full match first.
What if you think you will make less later in your career? Or you are unsure. A lower or no pension at all, less Social Security, and less TSP, 401k, or IRA distributions to take might put you in a lower tax bracket in retirement. Better NOT to make that commitment to Roth and pay the income taxes now. Make Traditional contributions and pay that lower tax later.
As you get closer to retirement age and your future looks clearer. You can go to the Social Security website and get an estimate of your Social Security benefits. If you are eligible for a military or government pension, you can estimate that. If you'll work part time in retirement, add in that income.along with what you will need to withdraw from Traditional retirement accounts for living expenses. How does your current income compare to your retirement income estimate? If you’ll be in a lower tax bracket in retirement, you don’t want to pay more tax now with a Roth contribution. Give Roth a pass and stick with Traditional.
Don’t forget that if you have or a Traditional TSP, 401k, or IRA you will have to take Required Minimum Distributions, and pay taxes on them, each year beginning at age 72. Even if you do not need all that money for living expenses right away, you are required to take out a certain amount from your Traditional retirement savings (called distributions) and pay taxes on those distributions each year. If you were a good saver and your investments grew well, these required distributions may bump you up into a higher tax bracket.
It might pay to convert or rollover some of those Traditional funds into a Roth account during that lull in income from when you retire to age 72. You could move enough to “fill up” your tax bracket. You pay less taxes on what you move each year until 72 while in that temporary lower tax bracket, than you would after 72 when you have to start those Required Minimum Distributions. If you’re already maxing out your yearly contributions and you go through a period at some point where your income will dip down into a lower tax bracket, then back up, it may be worthwhile to convert or rollover some of your existing Traditional account to a Roth account.
But beware there are A LOT of rules and possible tax consequences when moving money between the 401k/TSP and IRAs and within the IRA family. Honestly, it’s not a good time to go it alone. It is a great opportunity to tap into the expertise of a financial planning or tax professional.
So what about that IRA family? While the TSPs and 401k may seem like practical, simple folk. That IRA family can be as easy to comprehend as a dumpster fire. So today I thought I’d take on the stink, smoke, and confusion and make some sense of the IRA family. First off, remember all IRAs have the same allowed contribution amounts, that’s $6,000 a year, plus an extra $1,000 a year if your age 50 or over. Yes, those numbers are different than the TSP and 401k families. The IRA family is completely separate. And unlike real life, you can hitch yourself to a member of the IRA family AND a member of the TSP or 401k family at the same time, up to the full limit for each.
The first thing an IRA will wants to know about you is how much money do you make. If you’re single and make less than $76,000 a year or married making less than $125,000 a year you can contribute to a Traditional IRA.
Like other retirement plans with a first name Traditional, you don’t pay tax on your contributions when you make them or while your money grows. Your taxes are deferred until you pull it out in retirement. Many people are in a lower tax bracket when they retire, so they pay less taxes overall than if they had paid tax on those contributions while they were still working. But there’s a catch. If you make more than the income limits you cannot deduct contributions. You can court the Non-deductible Traditional IRA but is no great catch. Your contributions are non-deductible which means you will have to pay income tax on your contributions when you make them. The earnings will grow tax deferred. But when you pull it out, those earnings are taxed as regular income. So why would anybody swipe right on that IRA? Sad to say, they often are just using it to get in the family. Then dump old Non-deductible to hit on other hotter sibling Roth IRA, which I’ll get to in a little bit.
Like those other Roths, Roth IRA is tax-free in retirement. You need to leave it in the account for 5 years and be over 59 ½ years old to avoid taxes and penalty though. And what does the IRA family want to know before you start dating one of their own? How much money do you make?! If you are single and earn more than $140,000 or married earning more that $208,000 dollars you can’t contribute directly to a Roth IRA at all. You can’t just go in the IRA family front door, drop to one knee, and propose to Roth. Heartbroken? Well…there is always the backdoor.
The IRS does permit you to rollover money from other qualified retirement plans into a Roth, you just have pay to income taxes on it if you haven’t already. You can choose to rollover contributions from the Non-deductible account into a Roth account and it is transformed into tax-free forever savings. If your savings grew while it was in a non-Roth account, you would need to pay tax on just that increase at the time of the rollover. Some 401k plans allow you to rollover from a Traditional 401k to a Roth 401k. TSP does not allow you to transfer funds from Traditional TSP to a Roth TSP. But you can rollover from any Traditional 401k, Traditional TSP, Traditional IRA or Non-deductible Traditional IRA into a Roth IRA. You’ll pay some taxes on the money you rollover. But after that all the earnings are tax-free.
Depending on the rules of your retirement account, to can transfer or rollover your savings from one to another. You may do this to consolidate your savings in one place. Or you may decide to roll your savings over from a Traditional account to a Roth account to pay some tax now so you can save on taxes in retirement. Check the rules for your specific plan.
Still wondering if a Roth might be the one for you? Tune in next week as we look at some examples and things to consider as you make your big decision.
As we start a New Year and people I’ve been getting more questions about Roth retirement contributions. So I’m using the next few episodes to introduce you to Roth. Think of Roth as a retirement plan’s first name. Although Roths share the same first name, they belong to different families. And lthese families have their own family rules and norms. Common Roth last names are Thrift Savings Plan (TSP), 401(k), and Individual Retirement Account (IRA). So what’s so special about Roth? You pay income tax on your contribution’s BEFORE you put them into a Roth retirement account. All the money you earn on those contributions over the years is all yours, tax-free when you pull it out, as long as you meet a couple of requirements. If you have to pay taxes now, why would get hitched to a Roth? Look at what tax bracket you are in now. What tax bracket you will you be in when you retire? Generally, if you are earning less money now than in retirement, it pays to choose Roth and pay less tax overall in your lifetime. If you're earning more now, it often pays to choose one of Roth’s traditional siblings. To some extent you need a crystal ball to predict the future. I’ll cover more details and examples in another episode.
There is a special rule for our military servicemembers contributing tax-exempt combat pay to TSP. Put it in a ROTH TSP. You won’t pay tax if you use it to make contributions to a Traditional TSP account. BUT when you take that money out in retirement, you will be taxed on your contributions. If you will be earning tax exempt combat pay make only ROTH TSP contributions with that pay, not Traditional TSP contributions.
How long until you tap your retirement savings? Roth can be fun, but it could be a costly mistake if it’s a one-night stand. You have to wait for 5 years from your first contribution to a Roth and be at least 59 ½ years old when you begin withdrawals to stay tax and penalty free. There are just a few exceptions. Pull out early, and you’ll pay income tax on the earning and an additional 10% penalty for an early withdrawal. An early breakup is gonna cost you.
Also, Roth can be a faithful partner in old age. The IRS will require you to begin taking withdrawals from traditional retirement accounts at age 72. Your Roth retirement savings can stay invested and grow with you until you decide.
What about those last names? 401k plans are sponsored by your employer. They can offer a traditional 401k and a Roth 401k if they want. TSP follows the same rules as the 401k family. TSP does offer both Traditional TSP and Roth TSP. Your combined yearly contributions don’t exceed the limit, which in 2021 is $19,500 a year, plus an additional $6,500 a year if you are age 50 or older.
Roth IRAs? Your employer has nothing to do with it. You would open an IRA on your own. The IRA family is not tied to the TSP or 401k families in any way. For 2021, your combined yearly IRA contributions (whether Roth and Traditional) ca be $6,000 per year, plus an additional $1,000 if you are 50 or older. There is no rule baring you from contributing your full $19,500 total to the Roth and Traditional TSP family as well as $6,000 total to the Roth and Traditional IRA family. So to wrap things up, remember if your retirement plan has a first name of Roth, you pay income tax up front when you contribute, and as long as you follow the family rules, all your withdrawals are tax-free in retirement. If your retirement plan has a last name of TSP or 401k, you cam make contributions up to $19,500 a year, plus $6,500 a year 50 or over. through your employer. If your retirement plan has a last name IRA, you set the account yourself and can contribute up to $6,000 a year, $7,000 50 or over. And yes you can contribute the max amount to the TSP/401k family and the maximum amount to the IRA family at the same time.
Today we’ll ask five questions that will help keep your Thrift Savings Plan (TSP) and 401k retirement savings plans on track in the new year. So here’s your very own New Year’s retirement savings count down.
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Did you get a raise? Maybe you got promoted or got a bump in pay. Military are getting a 3% pay raise for 2021 and federal employees are getting a 1% increase in base pay. Military retirees, VA disability recipients, FERS retirees and CSRS retirees are all getting a 1.3% cost of living allowance (COLA) increase for this year. If you were able to get along with your previous income you, why not use your raise to increase your retirement savings? One technique I like to recommend is for each raise you get, give half to yourself for now and give the other half to your future self by increasing your retirement contributions. This can help you ease into a more savings year by year with hardly any pain.
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Are getting your full TSP or 401k match? Remember, you BRS military and FERS civilians need to save at least 5% of your basic pay every paycheck to get the full match. Contribute less than that and you permanently lose out on some matching funds and leave money on the table. Most 401k plans offered by civilian companies offer a match, too. Double check with HR to make sure your getting the most our of your 401k that you can. If you are already getting our full match, or you are a CSRS federal employee or non-BRS military and don’t get a match at all, try upping your game. Most people can’t meet their retirement goals if they only save 5% during their working years. Everyone is eligible save up to $19,500 to your TSP or 401k again this year.
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Are you getting special pay or a bonus this year? Consider socking all that special pay away for future goals like retirement. Why save all your extra pay for the future? Because if you are counting on that special income to cover your everyday expenses, you can really be screwed if circumstances change and you’re suddenly not eligible for that pay anymore. It can be “here today, gone tomorrow”. Not having that money to fund your wants is a bummer. Not having money to pay your day to day living expenses can be a disaster.
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Will you turn 50 this year? If so you can save an additional $6,500 a year to your TSP or 401k. You just need to turn 50 anytime in 2021. Even if your birthday is December 31st, you’re eligible to save the entire $6,500 extra. It’s called Catch-up contributions. And another nice thing is for the first time, you only have to fill out one form for TSP to designate both your regular and catchup contributions for 2021. So for you over 50 savers, that $19,500 plus $6,500 for a total of $26,000 a year you can contribute.
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Are you already saving up to your limit TSP or 401k limit? You can save an additional $7,000 in 2021 to an Individual Retirement Plan (IRA). If you’re married both you and your spouse can contribute $7,000 each, even if your spouse isn’t working. IRAs come in several flavors. Each have different eligibility requirements depending your income and are treated differently for taxes.
Did you mean to contribute to an IRA for you or your spouse last year, but didn’t or couldn’t? You still have time. You can still make 2020 IRA contributions up until April 15 of this year.
Bonus question for you more seasoned listeners. Will you be turning 72 in 2021? You must begin taking Required Minimum Distributions from your TSP, 401k, and Traditional IRAs. Miss this important retirement birthday task and there is a 50% penalty for each distribution you miss.
Thanks for sharing your journey with me with me over the last year. Here’s wishing you and your family a healthy and prosperous 2021. Want more information on how to prosper in 2021? Reach out at katie@moneypilotadvisor.com
Hello and welcome to our last podcast episode of the year. As if dealing with the Coronavirus in 2020 wasn’t crazy enough, the government is taking government funding authorizations down to the wire this year. As I’m recording this on Monday, December 28, the president has signed the monstrous 5,593 page, 2021 Appropriations Act. This Act includes authorization and details of the second round of Coronavirus stimulus checks and federal unemployment assistance, as well as a number of other changes.
Expect to see more information on all this in the coming days and weeks. To roll everything up, remember if you got a stimulus check in the first round, you should get another soon, $600 for each eligible person. If didn’t receive a check, but your income is lower this year than last, and below the phaseout threshholds, you will receive the stimulus benefits as a tax credit on your 2020 tax return. Unemployment benefits have been extended another 11 weeks, and for that time will include an extra $300 federal benefit, and will begin in the first week of unemployment. We talked about two changes to tax deductions. Itemizers can now deduct medical expense over 7.5% of AGI. The 90% of people who do not itemize can receive an above the line deduction for up to $300 per return for 2020. This was extended to 2021 and joint filers will be able to deduct $600 in 2021. If you claimed the Earned Income Tax Credit or Additional Child Tax Credit last year, but will have less earned income for 2020, you can use your 2019 income to calculate your 2020 credit. This should prevent you from losing out on those credits when you file your taxes this spring. If you have a Flexible Savings Account with funds left over at the end of the year, check with HR to see if they will be authorizing participants to rollover those funds to use next year.
I know his has been an earful of talk about taxes, but the just signed government funding authorization does have something in it for just about everyone. I hope you have found this useful. I you have any questions, reach out to me at katie@moneypilotadvisor.com. And I especially want to wish you a Happy New Year and good riddance to 2020.
Hello and welcome to the 25th episode. I am so excited to hit this milestone just in time for Christmas. I especially want to send a great big thanks out to all my clients. Working with you was the highlight of my year. You and your families are always on my mind and I love making a difference in your lives. It seems like a lifetime ago in March when we were getting a glimpse of our future. I sent out my very first podcast, episode one on March 20. It was titled Five Ways Caronapocalypse is Like Financial Planning. I feel like as we go through the holidays in the next couple weeks we all could use some extra cheer and a little more humor. So today, here’s a rebroadcast of that very first podcast. I hope you enjoy.
The #1 way Coronapocalypse is like Financial Planning is that it makes you ponder, What is really important to me? You’ve seen it in every zombie movie, somewhere between all the looting and last-minute sex, as the world becomes unrecognizable, the main character ponders what, or usually who, is most important to them in life. The coronavirus is scary and may have you thinking “What do I value?” “What do I regret?” “What would I have done differently?” It’s just like good financial planning - minus the sex and looting. At Money Pilot Financial Advisor we explore these kinds of questions with you to uncover what matters most in your life, and help you put your money where your heart is.
The #2 way Coronapocalypse is like Financial Planning is we are asking ourselves “Are my family and I safe?” Whether it’s the coronavirus, brain eating zombies, or unexpected financial threats, we want to know we can protect ourselves and be safe. It may take handwashing in isolation, a zombie killing chainsaw, or having an emergency fund, sound investments, and insurance. Unlike a flamethrower, comprehensive financial planning may not stop a zombie in his tracks, but it can give you confidence and safety when the world goes crazy.
The #3 way Coronapocalypse is like Financial Planning is that it pays to be prepared. It’s a little late to realize you’re nearly out of toilet paper and hand soap, that your idiot cousin wasn’t being his usual self but is actually dead, trying to kill you and eat your brains or that maybe you should’ve put ALL your money into those airline stocks last fall. You don’t have to go all out bunkers and bazookas, but a good financial advisor will help you minimize the risk of financial ruin and prepare to not just survive but thrive even when the going gets tough.
The #4 way Coronapocalypse is like financial planning is that this is no time to panic. You shouldn’t flee from the zombies headlong into a runaway truck. You know you seen it. Just like the CDC keeping us updated, giving us calm and practical guidance, and double checking everything is in place for us to ride this out, a good financial planner is there when you need them reminding you that you are safe well prepared and helping you navigate the troubled times.
The #5 way Coronapocalypse is like financial planning is we pull together to use our talents and resources to help each other. That’s what will get us through the coronavirus. That’s how the survivors fend off the zombies, and its how Money Pilot Financial Advisor can help you get through financial crises. No regrets. Brain intact. Reach out and let’s do this together.
Well it looks like we’ll be fending of the worst of the coronavirus in the next few months. Hang in there, we can slay this when we take care of each other. To all you health care workers and first responders, including my Mom and Dad, thank you for your sacrifices and hang in there. We love you. A huge shout out to the scientists at Pfizer and Moderna for giving us the best Christmas present of 2020. I’m looking forward to seeing everyone in in person sometime 2021. Take care and Merry Christmas.
Let's talk about financing your dream. I just bought a new horse and I’m so excited. We all have dreams. Sometimes we spend a lifetime pursuing a dream. Sometimes we realize we’re just never going to achieve it and move on to something else. Or it gets put on hold and sits somewhere in back of all the practical and “important” things. Since the first time I sat on a horse, I dreamed of life on horseback. It didn’t seem to matter to me that I didn’t show any particular talent for riding and training horses.
I actually raised pigs for two years to buy my first horse. I even went to college for horse science. But in the end I took an ROTC scholarship so I could finish school and had to join the Army. More than 20 years later my husband and I finally bought a farm and riding was a big part of my life again. I realized that I wasn't going to make it as a professional rider. I would be paying to ride not get paid to ride.
Fortunate for me, I began saving for “the future” a long time ago in a mutual fund that a fellow soldier recommended. This was long I knew anything about IRAs or military members could contribute to the Thrift Savings Plan. I sent in a just little bit of money each month for about 10 years, then just left it there with no real plan. It’s amazing what time can accomplish with investing. I since began saving much more seriously for retirement. But hat early seed quietly grew and grew and eventually became my horse fund. When it did well, I took extra lessons and competed more. When it was down I left it and pared back. Unfortunately, this year my horse oft 8 years had to retire. So it was time to take a hard look at the horse fund. What could I afford? As you probably know, the cost of a live animal goes well beyond the purchase price. They eat. In my case they eat like a horse!
So I set a limit for what I would spend buying a horse, leaving plenty in reserve for the upkeep and emergencies. And then I shopped and I shopped. I fund a couple I liked, but they each fell through. Then I had a chance to try a really nice horse…that was outside my price range. If things went well, he’d be ready to compete in the spring at a level that would save me a couple years of training. If things went south and I had to start over yet again, there r wouldn’t be much money for a replacement. I decided to go for it and insured him to help with risk. He came home last weekend. His name is Coffee.
The point is that we all have dreams. What is the value of a dream lived? Can you put a really price on that? Yes, you really can. And you really should before you reach for your wallet. The trickier question is what it’s worth it to you and what do you have to give up to pursue that dream. The higher the cost the more carefully should consider it. Maybe now’s not the right time. For me, my time wasn’t when I was younger and not sure I could finish college. It wasn’t the path of a professional rider, but the joy of an amateur who just does it for fun. What am I giving up by spending more than I first planned? The chance for a full dream do-over if this doesn’t work out. There won’t be much money left for yet another. But having a hard budget also means I’m not risking our retirement, or my husband’s well-being. Nothing will get repossessed.
So don’t give up on your dreams. Plan for them. What will your dream cost? What can you afford? What is it worth to you? Really. Put a dollar figure on it. And consider the cost to the one’s you love and who depend on you, and your future. Then save, invest, dream, and do. What are you working for? Living my dream is worth so much to me. But it’s not priceless. And I know I’ll wake tomorrow with no regrets, hoping it’ll be a long and glorious ride. I hope you will too. What’s your dream and how are you getting there? I’d love to hear. You can drop me a line at katie@moneypilotadvisor.com. And be happy out there
There are two types of in-service withdrawals, ones for financial hardship, and one for age-based in-service withdrawals. You must be at least age 59 1/2 to make an age-based withdrawal. You can make up to four age-based in-service withdrawals a year for any reason. Withdrawals from a ROTH TSP will be tax free. But you will have to pay federal income tax, and maybe state income tax on money withdrawn from a Traditional TSP. The TSP must withhold 20% of your draw for taxes. What you owe at the end of the year may be more or less than that, so plan ahead.
If you are under 59 ½ and still serving you may be able to make a financial hardship withdrawal for genuine financial need. TSP defines acceptable reasons for making a hardship withdrawal. The first reason is a continuing negative cashflow which is when your net income is less than your expenses. Tsp.gov has a worksheet to help you determine this amount. But before you drain your TSP seek help. For our military, your on-base financial counselors are an excellent resource and free. You can also get help online at militaryonesource.mil or call 1-800- 342-9647.
The second type of inancial hardship withdrawal is for extraordinary expenses that you have not yet paid and you will not be reimbursed for, including eligible medical expenses, personal casualty losses like from an earthquake or fire, theft and accidents., and eligible legal expenses. There are a lot of rules and fine print with these hardship withdrawals. . The TSP booklet on In-service Withdrawals found on tsp.gov and is a must read before you apply.
Hardship withdrawals are also taxed. TSP will withhold 10% of the taxable portion of your withdrawal for federal income taxes. The total amount you will actually owe at tax time could be more. And you may have to pay an additional IRS early withdrawal penalty of 10% if you are under the age of 59 ½.
You may want to consider the loan option. When you take out a TSP loan, it is not considered taxable income as long as you pay it back according to the rules. You borrow from your own TSP account plus interest. While you have the loan out, you will be paying interest on that amount instead of earning and growing your investment. There are also two types of TSP loans. You can take a general-purpose loan for any reason which must be repaid in 1 to 5 years. The residential loan can only be used to purchase a home which will be your primary residence and have a repayment period of 1 to 15 years. You can’t use a TSP residential loan to repay an existing mortgage, or for repairs or renovation, buying out someone else’s share of your home, or for buying just land.
If you take out a TSP loan, you will be required to make regular, scheduled loan payments through payroll deduction. You can shorten or lengthen the term of your loan, as long as you don’t go over the term limits. But you cannot stop making loan payments befroe loan is paid off with interest. If you default TSP will declare the entire unpaid balance and interest as a taxable distribution and if your under 59 ½ a 10% tax penalty. TSP also has a booklet titled Loans available online at tsp.gov. There are a lot of important details and you definitely need to read through it carefully if you are considering a loan.
Taking ot an in-service withdrawal or loan from your TSP is no small matter and comes with costs. Check out the resourcesat tsp.gov. Talk to a financial counselor at no cost on base or through militaryonesource.mil, or speak with professional financial planner like me. If you have any questions send me an email to katie@moneypilotadvisor.com.
Today we talk about what is government or military pension really worth. If you earn a military or federal government pension, you will receive a pension for the rest of your life, you can’t outlive it. You also get a cost-of-living allowance (COLA) based on inflation. A downside of the pension is that once you retire, that payment is set. You can’t increase it and only lasts for your life. Or if you participate in the Survivor Benefit Plan and die your spouse will receive up to 55% of your monthly pension for the rest of their life. Then that’s it. In contrast, investments like TSP can increase their value if you take on more risk. You may still have money left over in your TSP when you die they could pass on as an inheritance or gift to charity. But if you take less risk, like put money in the TSP G fund, your investments won’t keep up with inflation and you may run out of money before you run out of life.
What’s a pension really worth? One way of looking at it is to calculate its present value. The calculations are bit complicated, but generally the present value of your pension is the lump sum amount of money you need if you retired today, invested that lump sum at a certain interest rate, then drew out and spent the amount of your yearly pension, for set number of years.
If you are military E7 with over 20 years of service, or a GS 8/9, your annual pay is about $59,000. The service member serves 20 years and retires at 42 getting 50% of base pay in retirement, of just under $30,000 and can expect to live another 40 years. The present value of their retirement pay is over $750,000. The federal FERS GS 8/9 employee retiring at 57 with 30 years of service would have a yearly retirement pay of almost $20,000 and live another 26 years. The present value of their retirement pay is almost $380,000.
For Officer 05 retiring at 42 with 20 years of service, their yearly retirement pay would be $57,000. The present value of that is almost $1.5 million. For FERS GS 13/14, retiring at 42 with 30 years of service to about $730,000, with 40 years of service almost $975,000. As you decide whether to stay or whether to go this can give you a hard dollar figure to help you decide if it’s worth it for you to stay.
The military BRS and federal employees FERS retirement systems are based on a triad of the traditional pension we been talking about, Social Security, and the Thrift Savings Plan. I like to look at these planning for retiremen by, dividing your expenses in retirement in two NEEDS and WANTS. Needs would include food, housing, healthcare, taxes, transportation, etc. Estimate each of these costs for total dollar figure. Ideally your pension and eventually Social Security will cover those needs. This is your safety net. What if those needs are more than your pension? Consider ways to reduce those expenses. For everything else, your wants, you could cover these with your investments like TSP. If you take some risk (volatility) your investments can grow faster than inflation so buying power increases. This provides flexibility and maybe a nicer lifestyle. In years where there value is dropping, don’t draw from it or don’t draws much. Spend a little bit less on the wants, knowing your needs are covered by your pension and Social Security. Then when things bounce back you can go back to spending more on your wants again.
One area to look as you get closer to retiring is you may have a gap in “guaranteed” income between t receiving your pension and drawing Social Security. Also keep in mind some expenses like healthcare tend to rise faster than inflation. Over time your pension may not cover all your needs. This is where Social Security might help with some of those expenses. If you have any questions or are curious what the present value of your particular pension would be, just reach out to me at Katie that’s katie@moneypilotadvisor.com
I thought I follow-up this week with rental income tax tips for those of you that are landlords or considering becoming landlords. For tax purposes you need to be sure you document all your money coming in and going out of the rental property. That means giving receipts and keeping copies of the rent payments you collect. Keep in mind that generally you must report rental income on your tax return in the year you actually receive it. If you collect some advanced rent, such as someone paying two or three months’ rent upfront, you would again report this for taxes in the year you receive the payment, regardless of when that rent would’ve been due.
Now security deposits are handled a bit differently. Like income when you receive a security deposit, you need to record it and provide a receipt. But if you plan to return the deposit to the tenant at the end of the lease, it is not income. So you do not report it on your tax return. If in the end you keep part or all of the security deposit because your tenant doesn’t live up to the terms of the lease, then you would report the amount you kept as income that year. If your tenant gives you property or services instead of money as rent, you need to include the fair market value of the property or services as rental income. Also, if the tenant pays any of your expenses than those payments are also rental income. In this case you record what the tenant paid as income, and then claim the expense on your taxes as well.
Generally, the expense of renting your property out like maintenance, repairs, insurance, property taxes, interest if you have a mortgage on the property, advertising for new tenants can be deducted from your rental income which lowers the amount of income you have to pay income taxes on.
One area that can be confusing especially to new landlords, is how to treat improvements to the property for tax purposes, as opposed to maintenance and repair. One way to look at whether something is a repair or not is ask yourself if what needs to be done makes the property livable, but doesn’t increase the value of the property. Good examples are repairing holes in the wall from nails, unclogging a drain, or fixing the leak in a roof.
One way to know if something is an improvement rather than a repair is whether or not it improves the value of the property. If it does or it way extends the life of the property, then it is considered a long-term asset and deducted over years instead of all at once. Improvements can be things like replacing a roof, renovating the interior, or replacing a heat pump instead of fixing it. So for example having a repairman come out to fix a broken washing machine is repair. Buying a new washing machine is an improvement.
The key difference for tax purposes as the entire cost of a repair can be deducted as an expense in the year you do it. The cost of improvements cannot be deducted as an expense all at once. You have to claim part of the expense each year over the life of the improvement. This is called depreciation. Different improvements are depreciated over different lengths of time which are set by the IRS. And there are extra forms to fill out with your taxes for each improvement.
In addition to improvements, the price you paid for the rental property (not including the value of the land it sits on) is also depreciated. In this case for 27 ½ years. So each year you will claim depreciation for the rental property itself, as well as each of the improvements you make, each on its own timeline. This can be a bit complicated and this would be a good time to discuss it with the CPA. Or if you still want to do your own taxes, dive into IRS publication 527, Residential Rental Property.
If you have any questions or comments, please drop me a line at katie@moneypilotadvisor.com
For most military and federal employees deciding whether you should rent out your home usually comes up because you have orders to move to a new duty station or will be going on a long deployment. We’ll talk about the decision to sell or rent out your house, and then if you do decide to rent at your home what should you consider. Selling your home up for sale and finding a buyer takes time, so start early. Ask will you be able to sell for profit, or at least get enough to pay off the mortgage. Remember there will be closing costs, repairs and getting house ready for sale, fees for the real estate agent which can easily add up to 10% of your selling price. If you would have to dip into savings to pay off the mortgage after you sell, consider renting out. If you think you’ll return, it may be easiest and most profitable to just rent it out while you’re away.
Ideally the rent will cover all of your expenses including the mortgage, insurance, property taxes, maintenance and repairs, finding new tenants, and paying a management company. Mortgage interest rates are low now, it may makes sense to refinance. Rates are lower for a primary residence than a rental property. So it may pay to refinance while you are still living the home. Lower monthly payments may be the difference in whether your rental income would be more than your expenses. Don’t assume the rent in your area would automatically be enough to cover all the expenses. Do some research to get a realistic idea of what rent you could expect.
Can you meet all your living expenses if the rental was vacant for a while or needed a major repair? Do you expect home values in the area to go up? If homes are sitting empty or if the local economy is floundering, it may be better to sell while you can. Are cut out to be a landlord? You, or a management company, will need to find a good tenant, receive applications, do credit check and criminal history checks and check references. And make a detailed written lease applicable for the state and local area where the house is located. This is important especially if you need to evict a tenant.
Remember you need rental home insurance, also called fire insurance. To caver the home itself. You should encourage tenants to buy their own renters insurance cover their things. And consider hiring a management company, especially if you’re a first time landlord. They can help with all these things we just talked about.
Another thing to consider is the tax you would pay on the sale of your home. If you have lived in your home for at least two of the last five years before you sell it, you will not pay any federal tax on the first $250,000 of profit if you’re single, or $500,000 if you’re married. For federal employees and military service members, time stationed overseas on orders doesn’t count. If you don’t meet that 2 of 5 year rule you will owe capital gains tax on the profits, typically 15%, depending on your tax bracket. If you plan on hanging to the rental property long-term, then the income and possible appreciation would probably offset at additional cost in taxes.
Home ownership and having rental property can be a great way to built wealth, your tenants essentially buys you a home over time. But it comes with extra risk and being a landlord isn’t for everyone. And depending on your particular circumstances, it may not give you a positive cash flow. Weigh your options and ability to pay any unexpected expenses that may come up with the rental home. And especially if this is the first time becoming a landlord, don’t hesitate to work with a management company to help with the process.
Today we’re talking about the Thrift Savings Plan’s switch to the spillover method for catchup contributions. We’ll talk about what means, who is affected, and how you designate your catchup contributions going forward. Then we’ll go back over pointers for all TSP participants to help you max out your contributions and how to make sure you get your full match.
What is a catchup contribution? Everyone is eligible to contribute $19,500 to TSP for 2021. Once you reach age 50 you can make additional contributions if you want to, up to $6, 500 a year. So for participants 50 years old and up, the total amount you can put into TSP each year is $26,000. This even applies to you if you start off the year as a 49-year-old and turn 50 during the year.
What’s changed? Beginning with the first pay period of 2021, if you’re eligible to make catchup contributions, you now only need to fill out one form and it will stay in effect year after year until you make a change.
How do you max your contributions and get you full TSP matching contribution, if you’re eligible. Once you reach the annual limit, TSP will not process any more contributions for the rest of the year. Then, as long as you don’t make any changes, it will start up automatically again in January. But you need to know what happens to your agency or service matching contributions once you reach the annual limit. For CSRS feds and non-BRS military you are not affected by this timing because you don’t receive any matching contributions. But if you’re a FERS employee or blended retirement system (BRS) servicemember, your agency matches your contribution each pay period, then stops matching once you reach the annual limit. The problem is that the matching contribution is based on the amount of your contributions you make each pay period up to 5% of your basic pay that period. So if you hit the annual limit before the last pay period of the year, there’s no match in any pay period for the rest of the year. Make sure you spread out your contributions throughout the whole year so you contribute at least 5% of your basic pay every single pay period. That’s every month for military and every 2 weeks for Feds.
To figure out the minimum you need to contribute to get your match, check your LES. See what your base pay is for the pay period and multiply it by .05. This is the minimum amount you need to contribute to get your full match each pay period. Depending on your circumstances, you should definitely consider contributing more than 5% a pay period for retirement.
Once you’ve decided how much to contribute, make sure to spread it out through the year. You don’t want to hit a limit before your last pay period. You’ll take your annual base pay and divide that by the number of pay periods. For military that’s 12, and for civilians that’s 26. Take that number and round up to the nearest dollar. And that’s what you put on your TSP form. By rounding up to the nearest dollar that you’ll max out every penny of match.
If you are partially into a year and need to make a change, maybe because of a pay raise or change in circumstances, or just hate math, you can use the How Much Can I Contribute calculator on the TSP website at https://www.tsp.gov/calculators/how-much-can-i-contribute/#top I’ll put the link in the show notes.
Check out TSP’s website at https://www.tsp.gov/ for info on all things TSP. If you’d like to talk about your situation or would like you’re your question answered on a future podcast, send it my way to through my website https://www.moneypilotadvisor.com/ or you can email me directly at katie@moneypilotadisor.com Talk to you next week.
Mortgage interest rates are at historic lows right now. And you may be thinking, “Should I refinance my home mortgage?” In today’s episode we’ll walk through the decision making steps to help you decide, is refinancing a good decision now? Ask am I going to stay in my home for at least a few years? The average closing costs for a mortgage refinance are about $5,000. So if you're only going to be in your home for a few years, you may not save enough with a lower interest rate to make up for those closing costs. Are you nearing a milestone event, like retirement or a balloon payment on your existing mortgage? If yes, then consider refinancing before your options become more limited.
Next, are you trying to borrow more than 80% of the value of your home? If you are, you likely need to have private mortgage insurance. And this is an extra fee that you'll have to pay every month in addition to your normal mortgage payments.
Then ask, has my credit score recently improved? If yes, this is probably another good time check out refinancing, you may be eligible for a lower interest rate. Is your current mortgage a fixed interest rate? If yes, again, it's a good time look at refinancing for a better rate. Do you have an adjustable interest rate now and do you expect interest rates to rise in the future? There is a good chance interest rates will go up from these historic lows, so again, this is a good time to consider a refinance at a low fixed rate.
The the key question is, can you qualify for a new loan rate that is meaningfully lower than the rate you're paying now, or at least removes the need to have private mortgage insurance. Talk to a mortgage broker or your current lender and see what they can offer and what would be the closing costs. What's your breakeven point? How long would it take you to pay back those upfront fees?
Are you a veteran, live in a rural area, have lower credit or lower income? You may qualify for a VA, USDA or FHA loan. They come with some additional fees, but they don't require PMI. And you may still qualify if you're having trouble qualifying for a conventional loan. These government loans can offer lower down payments, favorable rates, and relaxed guidelines.
The next ask has the value of your home gone up significantly since you first bought it? If yes, you can contact your current lender to remove private mortgage insurance. Is your primary goal to reduce your monthly mortgage payments? If yes, consider a 30-year fixed rate mortgage, this will decrease your mortgage payments. And then you can apply that excess cash to your other savings goals or financial needs. Is your primary goal is to reduce your interest you pay over the life of the loan? Consider a shorter term loan like a 15-year fixed, you'll get lower rates usually than you would on a 30 year mortgage and pay interest for fewer years. So you'll save a significant amount of money by refinancing a 30-year loan to a 15-year loan.
He’s a link to a flowchart of today’s discussion:
Should I Refinance My Mortgage.pdf
If you have any questions, please reach out to me at katie@moneypilotadvisor.com
Two out of 3 adults say that money is a significant source of stress in their life this year. And more than half say they have experienced a negative financial impact from the pandemic. How about you? How are you doing? In today’s podcast we’ll talk about reassessing your financial life. We’ll -
Reassess Your Situation
· lost job
· pay cut
· kids still schooling from home
· rent troubles
Reassess Your Priorities
· what is, what isn’t
· first food and shelter, health and life insurance
· then longer-term
· info overload, focus on your top three
Reassess Your Budget
· listen to our last podcast, Episode #16 That B$%&@!
· Use apps like Mint or YNAB
· Continue paying off debt, especially mortgage
Reassess Your Resources
· Emergency Fund
· unemployment benefits
· Medicaid
· food stamps, food pantries
· Army Emergency Relief, Navy and Marine Corps relief Society, Air Force aid Society
· relatives
· line of credit (HELOC) versus credit cards
Back to Your Priorities, mental health
· family
· caring for others, charity
For more information check out our website: https://www.moneypilotadvisor.com/
Today, I thought we'd talk about that B word. You know what I mean. The budget. I don't even like that word, it just brings back memories of somebody telling me what to do with my money. And let's face it, we work hard for our money, we don't want somebody else telling us what to do. It's my life, it's my money, right? Same for you.
The first thing I usually do with clients when we're talking about the B word is really getting a good feel for what your values are. I give them a sheet of values circle the different ones, you might just think of it off the top of your head. But I encourage you to just sit down and just take a little bit of time. Things that might be on your list could be community, contentment, creativity, humanitarianism, hard work, originality, relationships, or one of may others.
So once we've got your values in life, it's then time to really nail down the values of your budget. That is the numbers, how much money's coming in, and how much money's going out, and where it's all going. A great way to do this is with objects that represent a certain amount of dollars. I use 2 different color blocks. You could use peanuts and almonds if you want.
First write each of your monthly expense categories on a card and fold it in half so it will stand up like a tent. Assign a dollar value to each green block, peanut, or whatever you're using. Let's say one block is worth $15. Divide your monthly income by that amount. So if you earn $2,600 a month, that's about 173 blocks. Count out 173 green income block. Then the number of blocks/nuts in front of each card that represents that expense. So if you rent is $1,500/mo that's 100 block in front of that card. Do that with all your expense categories. Do you run out of blocks before you run out of expenses? Then use yellow blocks, or almonds if your using nuts. This will make any shortfalls stand out.
Now step back and really look at it. Think back to your top 5 values you wrote down earlier. Do these piles reflect your values and what's important to you? Can you rearrange them by cutting in some places and adding more to other expenses to better meet your values and eliminate the yellow blocks. Put the new dollar amounts on the other side of each expense card. Here's you new, special you, budget.
Does your income or expenses change? Do the exercise again. Priorities and goals shift? Repeat. Keep going this way in life and you can put YOUR money where YOUR heart is.
Want to buy a kit to use? Maybe you ate some of your peanuts? You can purchase one here:
https://livewealthynow.com/shop/
Other resources , lke the Values Worksheet can be downloaded here:
https://livewealthynow.com/resources/
I love questions and suggestions for upcoming podcasts. Please reach out to me at katie@moneypilotadisor.com
Or on our website:
https://www.moneypilotadvisor.com/
Today, we'll ask the question, Do I need to buy life insurance? We'll answer the questions: Do I need it? Do I already have some? Is it enough? What kind do I need or want? What will it cost? And we'll talk about some timing for insurance.
Do I need to buy life insurance? First what is the purpose of the insurance. If you're young and on your own, you might not need life insurance. But if you have a spouse, young children, a family member with special needs or parents that are counting on your income, you should consider life insurance to take care of them.
How much insurance do you need? Consider covering your end of life costs at a minimum. The average cost of a funeral and burial can be around $10,000 to $12,000. Your debts and final bills will have to be paid off and your assets and belongings distributed according to your will or state law. This process is called probate and there are court costs, filing fees, and attorneys fees. In most states, if it’s just your car and some personal belongings there's a simplified process, which is quicker and cheaper. Otherwise, estimate 3% to 7% of your assets, or around $20,000 on average. Consider carrying insurance to pay off your debts, like your home mortgage, your car, and any credit card debt. Insurance is paid directly to your beneficiary, usually within days.
The next think about is providing regular income to the people that depend on you.. A typical rule of thumb is to have 10 times your yearly salary in life insurance to care for your loved ones. But if you're a fairly young family with children 20 times your annual salary would probably be even more appropriate. This can seem like a crazy amount of life. But remember, you and your family were counting on your future earnings to live on, to save for retirement, pay for the children's education, and pay off the home you live in. Fortunately, insurance is relatively cheap when you're young. Over time as you crossed these milestones, your insurance needs will be less and less.
If you're single and don't have anyone depending on you, a very small policy to cover your funeral and burial and legal fees may be quite adequate, and could be as low as $20,000. If it's just you and your spouse, no children and you both work, 10 times your annual income may be adequate.
Next, Do I have that much insurance already? If you're working you probably already have employer provided life insurance called Group Life Insurance. For active duty military there’s Service Members Group Life Insurance (SGL I). For federal employees, you're automatically enrolled in Federal Employee Group Life Insurance (FEGLI). The one downside - you lose your job, you lose your insurance.
If your group life isn’t enough, what kind of insurance do you need? For most people, term life insurance will cover your needs for the best value. It's called term because you buy it for a certain amount of time, typically 10, 20, or 30, years. For those number of years, your yearly premium will stay the same. When you reach the end of the term, the insurance ends. You just match how much insurance you need, and for how long to the policy. Usually Term Life is renewable, which means you can add another set number of years to your existing policy just before it ends. Your premium will be higher for the new term, but you normally don't need to undergo a physical.
There are other types of insurance as well, such as whole life, universal life, and variable life to name a few. These policies are designed to stay in force for your entire life. They are much more expensive. And if your insurance needs decrease over time as is typically the case, you're paying a lot of money for insurance, you don't really need later in life.
If you have any questions or you'd like to get a second opinion on your ins
Mortgage rates are down again to historic lows. So is this a good time to refinance your home mortgage? It might be. What should you consider when making this big decision? First, is the interest rate you get now lower than what you’re already paying? In addition to current rates, your credit score has a great impact on your rate. If you’ve been careful with your credit you may well qualify for better rate.
Are you making less money now than when you applied for your initial mortgage? Lenders don’t like to see mortgage payments making up more than 35% of your income. So if your income has decreased, you may not get a lower rate, or even qualify at all for a refinance.
Next, has the value of your home gone up? If so, you can often qualify for lower interest rates om a refinance. Also, if your borrowed more than 80% of your home’s value initially you are likely paying for Private Mortgage Insurance (PMI), which is added into your monthly mortgage payment. When you can refinance 80% or less of your current home value, you can avoid this extra monthly fee. Note tha t veterans with a VA loan or anyone with a USDA mortgage, these loans don’t require PMI.
Another benefit of refinancing when the value of your home is gone up, is that you may now qualify for a Home Equity Line of Credit (HELOC). A HELOC is a line of credit similar to a credit card. You get a preapproved, maximum credit amount you can borrow against your home. If you’re careful with your budget and spending a HELOC, can be an added safety tool after your emergency fund.
Also consider the term for paying back your new mortgage. If you’re tacking on another 30 years to years of payments you’ve already made, you may not be saving nearly as much as you hoped.
Refinance closing costs typically run 1 to 5 % of your mortgage’s principal. How much time is left on your current mortgage? Do you plan to move or think may sell your home in the next few years? You want to make sure you have enough years of lower interest savings to make up for those upfront fees and save you money overall.
If you like to explore your options on your own, there are some useful calculators available on the Internet. You can find one of these at https://www.bankrate.com/calculators/mortgages/refinance-calculator.aspx It’s usually worth at least doing enough research to make a rough comparison. You may be able to save thousands of total interest payments.
Have any questions on today’s podcast? Or maybe you have an idea you’d like discussed on a future podcast. I always love hearing from you. Visit our website at https://www.moneypilotadvisor.com/
Donate cash to charity, reduce your 2020 taxes! Thanks to the CARES Act nearly everyone can benefit this year. No need to itemize. Get the how to in today’s episode.
Just for year 2020, there’s a brand-new tax deduction for up to $300 of cash donations made to charity. This special deduction is only for taxpayers who do NOT itemize deductions, which likely includes you.
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Make a donation of cash. Goods like used clothing or furniture given to a thrift shop do not count.
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The organization you donate to must be an IRS tax exempt organization. Donations to friends and family, or random acts of kindness don’t count. The organization are donating to can confirm this for you, or you can look up the charity on IRS.gov.
https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
- You need to get a receipt. Most tax-exempt organizations will do this automatically for you, if not just ask for one.
This special 2020 tax credit for $300 of charitable donations is only available for taxpayers that DO NOT itemize. For taxpayers that DO itemize, there is also of special change for just 2020. Normally taxpayers who itemize can only deduct cash contributions up to 60% of your adjusted gross income. Any donation amounts over that can be carried over for up to five years and deducted later. The CARES Act lifts that 60% limit for 2020. There’s still a 100% adjusted gross income limit on ALL charitable donations, but there is now no specific limit for 2020 on CASH donations. Itemizers could donate all of their adjusted gross income in cash to a charity and deduct it for 2020.
If you have any questions or would like to suggest a topic for future podcast episode please reach out.
Website: https://www.moneypilotadvisor.com/
email: katie@moneypilotadvisor.com
You probably know that you have a right to a free annual credit report from each of the three major credit bureaus, Equifax, Experian, and TransUnion. What you might NOT have heard is that with COVID-19, all three credit bureaus are now offering weekly free credit reports through April 2021.
In today's episode we talk about how to request credit reports, what credit reports are, what is inside, and how to use alerts and freezes. We’ll also dive into protecting your identity and hear what my journey with identity theft taught me.
Did you see a bit more money in your mid-month pay today? It may not be a raise. If you are a service member or federal employee, FICA Social Security taxes will not be withheld from you pay for the rest of the year. The bad news is that it may all have to paid back after the new year. Are you ready?
Joins us today to speak with special guest Adrienne Ross, founder of Clear Insight Financial Planning. She also wrote a blog on this topic for the Military Financial Advisor Association. Check it out!
In today's episode we finish up our three part discussion about Net Worth. Remember net worth is calculated by taking what you own (assets) and subtracting what you owe (debt). We discuss how these two interact and examples of how to calculate your net worth. Most importantly we also explore how your decisions around net worth reflect your values (or not) and tips to grow our worth and live your best life..
In our last episode we started a conversation about net worth, which is the value of what you own (assets) minus what you owe (debt). Then we went in depth about the values of assets. Today, we go over the Deal with Debt. We cover types of debt, it's costs and benefits, and tips to keep it under control.
Today we're going to start a discussion about net worth which often comes up in financial planning. Your net worth is calculated by taking the value of your assets (what you own) minus your debt (what you owe). What's that really mean? Today we’ll start with a look at your assets, all the things you own. We’ll cover debt in our next in episode 9. Then wrap it all up in episode 10.
We'll cover homes, cars, investments, really anything you can own. What is its value? How does the value change? And how long will it last?
For more information, you can contact me at https://www.moneypilotadvisor.com/
Basically, there are three main types of insurance that cover your home and your personal property - homeowners insurance, renter's insurance, and rental property insurance. The key question here is whether or not you own the home you're living in.
Homeowners insurance is what you need when you own your home and you're living in it. Of the three types, homeowner’s insurance covers the most. Because of this, it is a bit more complex, costs more than the other two, and requires you to provide the insurance company with the most information. If you have a mortgage on the house your mortgage company will probably require you to have homeowner’s insurance. When you go to apply for home owners insurance you’ll answer questions about the house, like location, year built, etc.
A standard policy will cover damage and losses to the house itself, and your belongings (except vehicles). It also helps protect you from liability claims, such as personal injuries or pet-related incidents. It usually also covers other structures on the property like a shed or detached garage up to a specified amount. It’s also really important to know what’s not included in your policy, like flood or earthquake insurance. You usually need to separate policies for these. Ask questions and read the policy details. Ideally, your equals its replacement cost, that is what it would cost to rebuild - not your home’s purchase price. Your insurance agent should be able calculate the replacement cost for you.
You’ll also need to have an idea of what your personal belongings are worth. Take a good inventory. Going through your home with a smart phone and taking pictures of everything is a great way to start. Coverage applies to everything in your home beside the house itself, like appliances, clothes, furniture, electronics, and even the food in your fridge. It kicks in if your belongings are destroyed, stolen, or vandalized. More expensive items like jewelry or a special collection, may need added insurance.
If you rent an apartment or house or live in in the barracks or military housing, you need is renter's insurance. This covers all your personal belongings, as well as provide some liability coverage. It does not cover the building itself. That's the responsibility of the landlord. Renters insurance is the cheapest averaging less than $200 a year. It's also the simplest to get. The insurance company will want to know your address, and what your stuff is worth. If you have some more expensive items like jewelry or a special collection, you may need added insurance. It's very important to remember that the landlord's insurance will not cover your personal belongings. That's your responsibility.
Third type, rental property insurance, will cover a home you own and rent out to somebone else. It covers just the building itself and NOT the personal belongings of the tenants or renter. It also provides you the landlord, but not the renter, with some liability protection. However, as a landlord you should consider getting additional, sperate liability coverage, like an Umbrella Policy for extra protection from lawsuits. Rental property insurance often also includes coverage for lost rent if the house is partially destroyed and is not habitable.
I’ve covered some basics today and hope this clears things up a bit. There's a lot more to these kinds of insurance. Never assume you're covered for something. Read the policies carefully, ask questions, and discuss your specific needs with your insurance agent.
If you have any comments or would like your question answered on a future podcast, drop me a line. You can find my contact information at moneypilotadvisor.com.
Show Notes – Episode 6 TSP L Fund Changes
This July, the Thrift Savings Plan (TSP) has made some changes to its L Lifecycle Funds. These funds get their name from year you plan to retire and begin withdrawing your money, called the target date. You choose one appropriate target date fund. Then that fund invests your money based on how much longer you have to retirement. They manage a shift in risk by following a set plan, called the glide path. They invest in higher risk investments while your young and gradually shift your portfolio to less risky investments as you get close to retirement. Target date funds are typically available in retirement savings accounts like TSP or a 401(k) where you can invest by payroll deduction. You can also open an IRA and invest in a target date fund.
Target date funds continuously re-balance the fund as needed when the value of stocks values change and throw the fund out of balance, off the glide path. The fund managers are constantly “buying low and selling high" to keep the balance and stay on the path.
In choosing a target date consider when you will start withdrawing your retirement savings. You normally can't draw from these retirement plans until you're at least 59 1/2 years old, or you pay a 10% early withdrawal tax penalty. For military, its very unlikely you will be that old when you leave the service, even if you retire. So pick a date where you’re at least age 60. There is an exception for FERS employees. Your TSP will be exempt from the penalty if you separate from federal service in the year you turn 55 or later. For Special Category Employees (SCE), it's 50 or later. For everyone, the penalty will apply for most withdrawals from an IRA before age of 59 ½.
Also consider what kind of “retirement” you envision. Many peoples’ views are changing and they’re not just planning to hit 65, collect social security, and sit in a rocking chair. You may be thinking of a second career or doing something part time when you separate from government service. In that case, your target date might be even later. It’s up to you.
TSP calls its target funds Lifecycle (L) Funds. TSP has five core mutual funds C, S, and I are stock funds, G and F are bond funds. The L Funds invest in the 5 core TSP mutual funds in different percentages depending on where your target date year is along the glidepath. For example, L 2060 will invest almost entirely in the C, S, and I stock funds and a very small amount in G and F bond funds. That will shift gradually over time, so you are invested mostly in conservative F and G bond funds and much less in the stock funds at the target date. Once a target year arrives, that fund is retired and your savings are put in the L Income fund. This is the fund designed for TSP participants who are withdrawing their funds in retirement.
This July, there was some changes to the L funds. First off, there are more of them. They used to have an L fund for 10-year intervals. So if you were planning on retiring in 2025, you had to choose between L 2020 fund or L 2030 fund. TSP has now added more funds farther out, and at 5 year intervals. That’s an L Fund every 5 years from 2025 to 2065. This gives more options to our younger employees and servicemembers and makes it a little easier to pick an appropriate target if you were between the 10 year marks.
If you would like more detailed information, you can check out a blog I wrote for the Military Financial Advisors Association at their website: http://militaryfinancialadvisors.org/blog/You can find more information at: https://www.tsp.gov/funds-lifecycle/If you have any questions about today’s show, or would like to learn more, reach out and let’s do this, together. https://www.moneypilotadvisor.com
Should you stick with the Federal Employees Health Benefit Plan (FEHB), or switch over to TRICARE. Here’s what you need to know:
Who. To be eligible for FEHB, you must be a federal employee or a covered family member. In general, to be eligible for TRICARE, you must in the military or a family member; this includes guard, reserves, and retired military.
While activated, guard and reserves are eligible for the same Tricare plans as active duty servicemembers. Retired reservists age 60 and older are eligible for Tricare. However, drilling Guard and Reservists, and retired reservists under age 60, ARE NOT eligible for TRICARE if you are eligible for FEHB.
Tricare vs. FEHB.
Tricare Pros:
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Simple. Three main categories of Tricare – Select, Prime, Tricare for Life. Select and Prime are for eligible servicemembers under age 65. Tricare for Life is the only plan available for those 65 and older.
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Consistent. Plans and fees are the same nationwide (FEHB varies by state)..
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Cheaper (generally) than FEHB for similar coverage.
FEHB Pros:
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Choice. More types of plans, more providers, and more options.
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Offers High Deductible Health Plans (HDHP), some with Health Savings Accounts (HSA). These are not offered in Tricare.
Considerations.
If an HDHP is a good fit for you (only available in FEHB) look for one with an HSA that includes employer contributions. HSA’s are the account you deposit money to save and invest to pay the high out of pocket medical expenses associated with the HDHP. If your medical expenses are less than your contributions, these are a great savings tool. The money is yours forever, unspent money is rolled over from year to year. Your contributions and the earnings in your account are NOT taxed, ever, as long as they are used to pay medical expenses. When you turn 65, you are no longer eligible to maintain an HAS and any funds still in your HSA are distributed to you tax-free to spend or invest any way you want.
When you reach age 65, you must sign up for Medicare part B (unless you have an exception) and begin paying Medicare Part B premiums. Both Tricare for Life and HEFB work together with Medicare to cover your needs. Tricare for Life has no fees or premiums. When combined with Medicare coverage is nearly complete with very few other out of pocket expenses (other than Medicare premiums). HEFB plan costs are the same for retirees as for current employees. So you will need to pay your FEHB premiums AND Medicare premiums. Retired federal employees should review you FEHB coverage. You may be able to retain similar overall coverage (FEHB and Medicare combined) and lower your costs by switching to a less robust FEHB plan.
It is very important that you sign up for Medicare Part B when you reach age 65. If you have an exception, you must sign up as soon as lose your exception. There is a 10% Medicare Part B premium penalty for every year you delay (delay 5 years, you owe a 50% penalty). This penalty is permanent - you would need to pay it yearly for the rest of your life.
Tricare and FEHB in retirement.
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You must be enrolled in Tricare and/or FEHB for the last 5 years before retirement.
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You will need to enroll in FEHB (if you aren’t already) during the open season before your retirement to meet the requirement to be in FEHB on the day you retire.
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If you would like to move to Tricare after you begin federal retirement, SUSPEND (do not cancel) FEHB to retain the ability to go back to FEHB later if you want.
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If you cancel FEHB in retirement, it is permanent and you can never return to FEHB.
If you have any questions about today’s show, or would like to learn more, reach out and let’s do this, together. https://www.moneypilotadvisor.com
Show Notes
There are so many demands on your paychecks, it can be tough when you don't have enough cash to tackle all that at once. Here are my recommended top 3 priorities.
Emergency Fund. A common rule of thumb is to have three to six months of essential living expenses set aside. This will include groceries, your rent or mortgage payment, car payment, gas, and utilities, as well as insurance (health, life, disability, home, auto, renter’s…) If you lose your job or are furloughed, you can still cover all your expenses for t a few months while you get back on your feet. Three months worth of expenses can seem impossible at first. I recommend you start with a $1,000 goal. Put away what you can each month in a savings account Even if it's just $50 or $100 a month, keep it up and when you hit your first thousand dollars milestone dance a little jig and lift your sights on the three-month prize.
Ever wonder how you eat an elephant? One bite at a time. So, tackle your emergency fund the same way.
TSP Match. Contribute enough to your Thrift Savings Plan (TSP) to get your employer match. This is literally free money. For military in the Blended Retirement System, when you contribute 5% of your base pay to TSP, the government will match it, that is it put an additional 5% into your TSP account. Federal employees in in the Federal Employee Retirement System (FERS) who contribute 5% of your combined basic pay plus locality pay also get a 5% TSP match. Regular civilian employees such as spouses with 401(k) or 403(b) retirement plans through work often had some kind of match as well. Ask about the details. https://www.tsp.gov/making-contributions/contribution-types/
Saver’s Tax Credit. The Retirement Savings Contribution Credit, nicknamed the Savers Credit, is a program to help savers with modest income put away little extra for retirement. Up to certain income limits, military and civilian employees that put at least $2000 a year in their TSP (or other qualified retirement plans like IRAs and 401(k)s) can receive the federal tax credit for up to 50% of their contributions. This is a tax credit that will reduce your federal tax bill dollar for dollar (but not below zero). https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit
Pay off Credit Cards. The average interest on a credit card balance is from 14% to more than 25% a year. If you have $1,000 in credit card debt, that could be more than $250 in interest added in the first year. But that snowballs as you pay interest on top of interest. Chances are, if even you stop using the card and you're making minimum payments, that balance on your card will still grow, larger year after year, like an elephant.
The only way out from under this is to make larger payments on your card until the whole thing is paid off. Find a payment that is more than the minimum required, and pay each month until it starts to shrink.
How to Prioritize? You can tackle these three savings priorities one at a time. I recommend you put some money toward each one every month, starting now. You'll gain a bit more peace of mind each month knowing that you can weather a storm, you're investing extra, free money for your future, and that credit card elephant is will start disappearing before you know it.
If you have any questions about today’s show or would like to learn more, reach out and let’s do this, together. https://www.moneypilotadvisor.com
How much are? Eligible adults receive $1,200 each, plus $500 per child. You’ll receive that full amount if you’re a single taxpayer with income less than $75,000 a year or a couple married filing jointly with less than $150,000 a year. Above those amounts, the stimulus funds phaseout to zero for single taxpayers above $99,000, and joint filers above $198,000 a year.
When? The IRS says most of people eligible will have their money within the next two weeks. Unfortunately, it will take much longer if you typically don’t file tax returns or opt to receive paper checks. The IRS has promised to rollout a “Get My Payment” app in mid-April. It will provide payment status, confirm direct deposit or check, and enter your information for direct deposit. Here's a link: https://www.irs.gov/coronavirus/economic-impact-payments
How will I it? If the IRS has direct deposit information for you already, your funds will automatically be deposited in the same bank account. If you’re receiving Social Security retirement, disability, or survivor benefits, your money will automatically be deposited in the same bank account as your benefits. Even if you will not be filing taxes, you may still be eligible to receive the stimulus funds. Here's a link with more information. https://www.freefilefillableforms.com/#/fd/EconomicImpactPayment
What should I do with the money? If you’re already unemployed or might be, spend what you have to on just basic essentials. Reach out to your creditors, contact your landlord, utility companies, or mortgage companies and ask for help. They may be able to temporarily reduce your rent. Many cell phone and utility companies have pledged not to cut service or charge late fees during the pandemic. Mortgage companies may allow you skip some payments without penalty.
If you can add to or start an emergency fund. We don’t know how long the full impact of the Coronavirus will last. So try to put away enough in a savings account now to cover six months’ worth of expenses.
If your job is secure, you have at least six months’ worth of expenses put away in your emergency fund and you don’t need your stimulus funds immediately, here are a few more ideas:
Consider putting your money where your heart is. A lot of people and small businesses are really suffering. You can donate to a charity, such as a local food bank or group fighting the disease. Find ways to support your local small businesses, perhaps buying meals to deliver to healthcare workers on the Coronavirus front lines. Or buy for a gift card or service online to use after social distancing is lifted. It all helps.
If you have high interest credit card debt this could be a good time to pay that down that debt or maybe even pay off completely. Imagine exiting this crisis with that burden lifted and having money freed up for you other goals and priorities?
Still have money on the table, you might consider investing in a Roth IRA. Any future increase in the value would be tax-free if you withdraw after age 59 ½. And you can still make 2019 contributions up to July 15 this year, as well as contributions for 2020. If you have children or grandchildren you might consider establishing a tax advantaged 529 account for a child’s education. Or with interest rates low again, it may be worth using stimulus money to refinance you mortgage.
No matter where you may want or need to spend your stimulus money, this is a good time to contact a financial advisor to help navigate the benefits and pitfalls of different options. Still have questions? Reach out and let’s do this, together. https://www.moneypilotadvisor.com
Lean on Me
Hello everyone, welcome to the second episode of the Money Pilot Financial Advisor podcast. With all the difficult and crazy news about Coronapocalypse I missed the sad news of the death on March 30 of this year of Navy veteran and musical artist Bill Withers. With so many people hurting, afraid, and isolated his song “Lean on Me” keeps ringing in my ears. What’s on your mind? Are you fighting to be brave for your patients, your family, your employees? It’s time to reach out and lean on someone. “We all need someone to lean on.” It can be hard to reach out when you’re the one others are depending on or if you’re feeling overwhelmed.
This time last year, I was thinking about a time in my life where I was struggling and felt alone. I was writing a speech to deliver for a commencement ceremony at my alma mater. With some quiet time and the benefit of hindsight, I reflected on what I learned from that time and what I wish I had done differently. My key take away? Reach out. Reach to out to help someone else, and reach out when you need help.
Here’s the recording of what I had to say.
(SPEECH)
While there it is. Are you overwhelmed, tired, afraid, or lost? You are not alone reach out, reach down to help a friend, and especially reach up and except help. We all need someone to lean on. For all of you out there be safe, be there, and be kind to yourself.
Episode 1 Five Ways Coronapocalypse Is like Financial Planning
The #1 way Coronapocalypse is like Financial Planning is that it makes you ponder, What is really important to me?
You’ve seen it in every zombie movie, somewhere between all the looting and last-minute sex, as the world becomes unrecognizable, the main character ponders what, or usually who, is most important to them in life. The coronavirus is scary and may have you thinking “What do I value?” “What do I regret?” “What would I have done differently?” It’s just like good financial planning - minus the sex and looting. At Money Pilot Financial Advisor we explore these kinds of questions with you to uncover what matters most in your life, and help you put your money where your heart is.
The #2 way Coronapocalypse is like Financial Planning is we are asking ourselves “Are my family and I safe?”
Whether it’s the coronavirus, brain eating zombies, or unexpected financial threats, we want to know we can protect ourselves and be safe. It may take handwashing in isolation, a zombie killing chainsaw, or having an emergency fund, sound investments, and insurance. Unlike a flamethrower, comprehensive financial planning may not stop a zombie in his tracks, but it can give you confidence and safety when the world goes crazy.
The #3 way Coronapocalypse is like Financial Planning is that it pays to be prepared.
It’s a little late to realize you’re nearly out of toilet paper and hand soap, that your idiot cousin wasn’t being his usual self but is actually dead, trying to kill you and eat your brains or that maybe you should’ve put ALL your money into those airline stocks last fall. You don’t have to go all out bunkers and bazookas, but a good financial advisor will help you minimize the risk of financial ruin and prepare to not just survive but thrive even when the going gets tough.
The #4 way Coronapocalypse is like financial planning is that this is no time to panic. You shouldn’t flee from the zombies headlong into a runaway truck. You know you seen it. Just like the CDC keeping us updated, giving his calm and practical guidance, and double checking everything is in place for us to ride this out, a good financial planner is there when you need them reminding you that you are safe well prepared and helping you navigate the troubled times.
The #5 way Coronapocalypse is like financial planning is we pull together to use our talents and resources to help each other. That’s what will get us through the coronavirus. That’s how the survivors fend off the zombies, and its how Money Pilot Financial Advisor can help you get through financial crises. No regrets. Brain intact. Reach out and let’s do this together.
Visit our website: www.moneypilotadvisor.com
National emergency, seemingly unstoppable threat, lines, bare shelves, families hunkered down in their homes. People are afraid. It all seems surreal. I know you’re thinking. It’s like a zombie apocalypse, minus the zombies.
So, for all of you who getting of cabin Fever, we're dedicating the first few episodes of our new Money Pilot Financial Advisor podcast to Financial Planning in the Coronapocalypse. I used to be an Army Black Hawk helicopter pilot. So I can tell you, just remind yourself - my engine’s not on fire, nobody is shooting at me, and zombies are not trying to eat my brains. And even if they are, we’ve got our buddies to help.
Check out our first episode “Five Ways the Coronapocalypse is like Financial Planning”, and we’ll get through this…together.
Visit our website at www.moneypilotadvisor.com