Welcome to To Your Wealth, a simplified, weekly, personal-wealth Q&A! Sometimes you just don’t know what you don’t know…Or perhaps you just have that one issue keeping you up at night. Either way, every Tuesday, we’ll be answering one of your personal finance questions, so be sure to keep those queries coming. Click on Submit a Question below, and then keep an eye out for when your question will be featured!
- 1. I’ve created a trust fund for my kids. When and how do I tell them?
- 2. My family member recently passed away and I inherited their estate. Will I owe taxes on my inheritance?
- 3. I own my own business. Can I hire my teenage children to work for me?
- 4. My spouse & I are thinking about buying a vacation home and are curious about any tax impacts we might experience (due to TJCA Tax Reform) if we finance the purchase.
- 5. We want to save for our children’s college education. Is there a way to jump start our savings this year with a larger contribution to their 529 accounts without incurring a gift tax?
- 6. I purchased a $5 million life insurance policy 5 years ago to provide for my family if I pass prematurely. Will the death benefit negatively impact my family’s inheritance due to a higher estate tax liability?
- 7. I just applied for Social Security benefits – when can I expect my first check?
- 8. Can I continue to contribute to my Health Savings Account after I retire?
- 9. I have $200,000 of company stock in my 401(k) with a cost basis of $25,000. Someone mentioned that I can roll it out of the account under the NUA Rule. What is the NUA Rule and how does it work?
- 10. I’m getting ready to sell my house. Where can I get the most “bang for my buck” when making upgrades?
- 11. I’m purchasing my first home and am unsure what replacement cost option I should choose for my homeowners insurance. What are my choices?
- 12. How do I know when it makes sense to refinance my mortgage?
- 13. What’s an appropriate amount of money to spend on a wedding gift?
- 14. I use budgeting apps but still can’t seem to stick to my budget. Where do I go from here?
- 15. I just inherited money. What should I do with it?
- 16. When should I use my debit card and when should I use my credit card?
- 17. I’d like to begin introducing my elementary-age children to financial concepts. Where should I begin?
- 18. My parents are in their 80s and I worry about them falling victim to a scam or fraud. Is there anything I can do to prevent this from happening?
- 19. My 401(k) offers a Roth option. Should I contribute to it?
1. I’ve created a trust fund for my kids. When and how do I tell them?
To Your Wealth - March 5, 2019
It’s difficult to pinpoint the perfect moment to have that conversation but there are certainly some prerequisites. First, make sure your children have demonstrated an understanding of personal finance topics such as budgeting, saving, and debt. Other indicators that your child is ready to know about your generous gesture may include maturity, responsibility, and work ethic.
Once you’ve determined your child is ready to know, let the trust language tell the story. Make sure they understand whether there are restrictions on when or why they have access to the money. For example, a trust may be earmarked for the down payment on a home or the funds may become available once the beneficiary graduates college. If the recipient has free reign on trust assets, be sure to communicate your expectations, whether it be entrepreneurship, philanthropy, or other guiding principles that will help them be good stewards of your hard-earned wealth.
2. My family member recently passed away and I inherited their estate. Will I owe taxes on my inheritance?
To Your Wealth - March 12, 2019
It’s very unlikely, but it depends. There are three possible taxes involved. The first is estate tax, which is levied at the federal level. If the value of your family member’s estate is under the lifetime exclusion ($11.4M in 2019) then you’re in the clear. If their estate is above the exclusion amount, your inheritance may be reduced by the amount of estate tax owed; however, the tax won’t be paid out of your pocket.
The second possible tax is charged at the state-level. There are six states that still charge inheritance taxes on the person receiving the inheritance. Check the rules for the state in which your family member lived and owned property.
Lastly, some assets have capital gain tax or ordinary income tax implications. For example, if you inherit shares of a stock you will owe capital gain tax if you sell the stocks at a gain. If you inherit an IRA you will owe ordinary income tax on the Required Minimum Distributions and other withdrawals.
Taxes can get confusing. Consult with a tax professional if you’re still not sure whether you will owe Uncle Sam.
3. I own my own business. Can I hire my teenage children to work for me?
To Your Wealth - March 19, 2019
Yes. Hiring your teenage children can prove to be a useful tax strategy if you play your cards right. Your child won’t owe taxes on earned income up to the standard deduction ($12,000 for single filers in 2019). Depending on how your business is structured, there may be additional deductions and tax strategies in your favor.
Be careful. The IRS requires business owners to provide reasonable compensation to working children for meaningful and helpful work related to the business. Chores like mowing the lawn or doing the dishes do not count. Treat them just like any other employee: fill out the necessary paperwork, leave a paper trail, keep track of their hours, and follow labor laws.
4. My spouse & I are thinking about buying a vacation home and are curious about any tax impacts we might experience (due to TJCA Tax Reform) if we finance the purchase.
To Your Wealth - March 26, 2019
If you itemize your deductions on Schedule A of your federal tax return, the mortgage interest paid on the loan will reduce your taxable income. With the passage of the Tax Cuts and Jobs Act effective in 2018, you can deduct your interest expense for qualified home purchases on combined loan amounts up to $750,000 (down from the prior limit of $1,000,000); and $375,000 for married filing separately (down from $500,000). These limits apply only to loans originated after 2017. If this a determining factor in your vacation home purchase, you should discuss this further with your financial advisor or tax preparer to better understand the true impact to your situation.
5. We want to save for our children’s college education. Is there a way to jump start our savings this year with a larger contribution to their 529 accounts without incurring a gift tax?
To Your Wealth - April 2, 2019
Yes! In 2019, the annual gift tax exclusion amount is $15,000 per person ($30,000 if a gift is made from married couples). If you prefer to make a larger contribution to your children’s 529 accounts without being subject to gift tax, you can make up to 5-years’ worth of the exclusion amount to each of their accounts (5 x $15,000 = $75,000; or $150,000 for married couples).
- Contributions at this level are prorated over a five-year period, therefore no additional gifts can be made to the child or the 529 account over the next four years if you want to avoid filing a gift tax return.
If an amount greater than $15,000, but less than $75,000, is gifted to the plan in a given year, additional contributions can be made each subsequent year without incurring gift taxes, up to the prorated level of $15,000 per year. (Or double this amount for married contributors.)
Keep in mind that the maximum allowable contribution amount to 529 plans are set by each state and range between $200,000 and $500,000+ per beneficiary. It’s important to know the limits of your child’s 529 plan.
6. I purchased a $5 million life insurance policy 5 years ago to provide for my family if I pass prematurely. Will the death benefit negatively impact my family’s inheritance due to a higher estate tax liability?
If you’re the owner of the policy, the policy proceeds will be included in your estate and subject to estate taxes when you pass. This year, federal estate taxes are not owed until the value of an estate exceeds $11.4 million. Adding $5 million to the value of your other assets could tip you over the tax-exempt threshold. If it doesn’t, then no federal estate tax would be owed on your estate when transferred to the next generation (under today’s federal estate tax law). Keep in mind that bequests to spouse are not subject to estate taxes, no matter how much is passed on to him/her.
Changing ownership of the policy to another trusted individual or irrevocable trust can help avoid this. Before taking action, however, it’s important that you consult with your trusted advisors to understand the requirements that must be met to make this change effective.
7. I just applied for Social Security benefits – when can I expect my first check?
To Your Wealth - April 16, 2019
Social Security benefits are paid in arrears, thus, your first deposit will arrive the month after your requested application date. (If you signed up for benefits to start in April, your first deposit will arrive in May.)
Social Security benefits are always paid on Wednesday; however, what Wednesday of the month depends on your birth date.
- If your birthday falls between the 1st through the 10th of the month, you can expect your deposit on the 2nd Wednesday of each month.
- If your birthday falls between the 11th and 20th, your deposit will arrive the 3rd Wednesday.
- And if you were born after the 20th of the month, your deposit will arrive on the 4th Wednesday
There are a few variances from the above rule:
- If you receive both Social Security and SSI payments, your deposit will arrive on the 3rd day of each month, and
- If your deposit is to arrive on a holiday, you can expect it a day early.
Social Security checks are no longer mailed via the USPS. Your benefit can be received by direct deposit to your bank account or via auto deposit to your Direct Express® Debit MasterCard® account (a prepaid debit card).
Here is the full Social Security benefit calendar for 2019.
8. Can I continue to contribute to my Health Savings Account after I retire?
To Your Wealth - April 23, 2019
The short answer is “yes”, as long as you’re enrolled in an HSA-qualified high deductible health plan and haven’t signed up for Medicare. Be careful:
- Even enrolling in Medicare Part A automatically disqualifies your HSA contributions.
- If you contribute while ineligible, your contributions need to be corrected. Excess contributions need to be retracted in the same calendar year to avoid penalty. Any earnings on the contribution must also be removed, with the income portion reported as “other income” on your tax return. Failure to withdraw the excess amount prior to year-end will subject you to a 6% excise tax each year that the funds remain in the HSA.
- Even if you can no longer contribute to the HSA, funds in the account remain available for your use, and can even be passed on to your beneficiary(ies).
Check out our article on Medicare and HSAs for more information.
9. I have $200,000 of company stock in my 401(k) with a cost basis of $25,000. Someone mentioned that I can roll it out of the account under the NUA Rule. What is the NUA Rule and how does it work?
To Your Wealth - April 30, 2019
NUA stands for “net unrealized appreciation.” This is the difference in value between the stock’s purchase price (cost basis) and today’s price. Under this Rule, company stock can be distributed out of your employer’s retirement account with favorable tax treatment: the distribution is not subject to tax until the shares are sold and the distribution is not subject to the early withdrawal penalty.
When the stock is sold outside of the retirement account, the basis is taxed at ordinary income tax rates, the NUA is taxed at the capital gain rate, and net investment income is not subject to the 3.8% Medicare surtax. 100% of a typical distribution from a retirement account would be subject to ordinary income taxes (and potentially the Medicare surtax).
- A $200,000 distribution from your retirement account, taxed at ordinary tax rate of 37% results in a $74,000 tax bill (37% is currently the highest tax rate)
- If the $200,000 of company stock was distributed and sold under the NUA Rule, the tax bill would be $44,250 ($25,000 taxed at 37%, plus $175,000 at 20%/capital gain tax rate)
When rolling company stock out of your retirement account, 100% of the account must be rolled. The stock will be distributed in certificate form and the balance must be rolled to an IRA or another employer retirement account (if allowed). (Be careful! If the company stock is rolled into an IRA, the NUA rule no longer applies.)
10. I’m getting ready to sell my house. Where can I get the most “bang for my buck” when making upgrades?
To Your Wealth - May 7, 2019
According to Hanley Wood’s Housing Continuum Study, over 70 percent of homebuyers plan to remodel. While kitchen and bathroom renovations are common, you may have better results spending your money elsewhere. Go back to the basics and give the bones of the house an upgrade. Start with energy efficiency; replace attic insulation, install a new HVAC and water heater, or replace old windows. If you have the budget and time, replace the siding on your house. According to Remodeling Magazine, you’re likely to recoup 92.8 percent of the cost of adding new siding.
First impressions are not to be overlooked. Another area to focus your dollars on is the front yard. Consider putting a fresh coat of paint on your front door, pulling weeds, and adding new flowers and mulch. Studies have shown that you make back 91% of your investment when replacing your front door.
11. I’m purchasing my first home and am unsure what replacement cost option I should choose for my homeowners insurance. What are my choices?
To Your Wealth - May 14, 2019
Guaranteed replacement: This option covers 100-percent of the cost to repair or rebuild your home, with no limit. This type of coverage is the most expensive, but it’s the recommended type of coverage if you would want to rebuild your home exactly as it is today. (An endorsement to the base policy would be required for guaranteed replacement.)
Replacement cost: With this option the maximum amount the insurance company would pay is the amount stated in your policy. This type of coverage is less expensive and, not surprisingly, the most common. Determining the replacement value of your home each year is imperative to ensure the insurance amount paid doesn’t “fall short” of the actual cost.
Actual cash value: This option pays for replacement of the home, reduced by depreciation or wear on the property. This type of coverage is not typically recommended, but may be appropriate under particular circumstances.
12. How do I know when it makes sense to refinance my mortgage?
To Your Wealth - May 21, 2019
Refinancing can be a great idea if the interest rate on your refinanced loan is at least one percent less than your current interest rate. All other things equal, the lower the interest rate means a lower monthly payment.
Another way to justify a mortgage refi is by looking at the break-even point. Similar to when you first took out a mortgage, there are closing costs associated with refinancing. To calculate your break-even point, divide your closing costs by the difference in your monthly mortgage payments under the refi. For example, if the closing costs are $2,000 and the monthly payment decreases by $100 per month, the break-even point is 20 months. If you plan on selling the home before the break-even point, then refinancing doesn’t make sense.
You should also consider the timing of the refi. You build equity in your home when you pay down the principal. However, during the first years of your mortgage, most of the monthly payment goes toward interest. Let’s say you’re 12 years into a 30 year loan when you decide to refinance into another 30 year loan. This means you’re going back to paying mostly interest, and once it’s all said and done you’ll have made 42 years worth of mortgage payments!
13. What’s an appropriate amount of money to spend on a wedding gift?
To Your Wealth - June 4, 2019
Being a wedding guest can be harsh on your budget, especially if you’re in the stage of life where it feels like you have a wedding to attend every other weekend. When it comes to gifting, it can be difficult to determine how much to spend and what to spend it on. To put it plain and simple: there is no minimum gift amount. You may have heard that the general rule of thumb is to “buy your plate” however; it may make more sense to base your gift on a) what you can afford at the time and b) your relationship to the couple.
Once you’ve nailed down how much you’re willing to spend, you’re left with picking out the gift. More often than not, the couple has put together a registry of items they would like. Get to the registry early so you have more options that fit your price range. Increasingly, couples have been requesting contributions toward their honeymoon in lieu of physical gifts like you’d see on a registry. Cash or check is always an option too. Remember that in the end, it’s not about the gifts so don’t bust your budget over it. Happy wedding season!
14. I use budgeting apps but still can’t seem to stick to my budget. Where do I go from here?
To Your Wealth - June 11, 2019
Budgeting apps are great, but if you don’t check your Mint account as often as your Instagram or inbox, is it really worth it? Just like reusable grocery bags stowed away in your trunk, the phrase “out of sight, out of mind” rings true. If you find that budgeting apps aren’t keeping you in check, try envelope budgeting.
Envelope budgeting is when you begin the month entirely in cash. Each budget category is stored in a separate envelope. Once you spend down the cash for the month you can’t spend in that category until the next month arrives. Many people find that paying in cash is more difficult than swiping a card, thus making one question whether they really need that new pair of tennis shoes. If you struggle in just one of two areas of your budget, try envelope budgeting for just those expenses.
15. I just inherited money. What should I do with it?
To Your Wealth - June 18, 2019
Inheritances can come in all shapes and sizes. Someone wanted you to receive the money and it’s best that you act as a responsible steward. It may be tempting to indulge yourself in a vacation, splurge on an expensive item, or possibly increase your standard of living. Before you do so, make sure you’ve covered all of your bases. Here are our suggestions as to your potential checklist items before making any decisions.
Follow in this order:
- Establish an emergency fund of 3-6 months of your living expense
- Pay down high-interest debt such as credit cards or student loans
- For tax-efficient investing, consider increasing your 401(k) or 403(b) deferrals and making deductible IRA contributions if applicable.
- For tax diversification, consider investing money in a brokerage account. Once investments are sold, they are taxed at capital gains rates instead of as ordinary income.
16. When should I use my debit card and when should I use my credit card?
To Your Wealth - June 18, 2019
When it’s time to checkout you may be faced with the decision: debit or credit? Credit and debit cards each have their place and there are certainly situations when one is better than the other.
Opt for your credit card when making online purchase because they typically offer greater protection against fraudulent activities. Credit is also preferable when traveling abroad because credit cards typically often have fewer foreign transaction fees. Reach for your debit card if you’re operating on a tight budget. The spending limit is your checking account balance, unlike the credit limit on a credit card. If you’re in need of cash, your best bet is using your debit card at a free ATM since nearly all credit cards charge a much higher rate for cash withdrawals, even up to 24%!
17. I’d like to begin introducing my elementary-age children to financial concepts. Where should I begin?
It’s great that you’re eager to begin teaching your children about finances! During the elementary school years, there are several ways you can introduce your children to basic financial concepts.
- Give them an allowance: Paying your children for completing assigned chores around the house can be a good way for them to begin earning their own money.
- Open a bank account: Teach your kids the importance of saving by opening a checking or savings account for them (one that earns interest is advisable). We suggest having them save a portion of their allowance or cash gifts received. And in time, they’ll enjoy watching their account balance grow.
- Responsible spending: It’s important to provide some guidance as to how your young child spends his/her own money; however, allowing them to make the final decision will help them understand the outcome from good versus bad spending…and how they feel in both circumstances.
- Share the wealth: Begin talking with your children about giving to others. Most children enjoy picking out gifts for family members or friends. They may also have a special interest that they didn’t know they could support via a small donation (for example, giving to an animal shelter if they love animals). Having them set aside a portion of their earnings for gifts to others or for a special cause can help them develop a lifelong attitude of sharing.
18. My parents are in their 80s and I worry about them falling victim to a scam or fraud. Is there anything I can do to prevent this from happening?
To Your Wealth - July 9, 2019
Unfortunately, your parents belong to a vulnerable group whose age and money are constantly being exploited. While there isn’t much you can do to prevent the fraudsters from pursuing them, you can help your parents prepare their defense. Consider employing some of the strategies below:
- Educate your parents on examples of common fraud techniques including email scams, phone messages, and mailings.
- Teach them quick responses to unwanted solicitors such as “I never buy from someone who shows up unannounced. Send me something in writing.”
- Encourage your parents to let unknown calls go to voicemail. If the call is important, the caller will leave a message.
- Replace their landline with a cell phone, unlist their numbers from public directories, and/or sign up for opt-out and Do Not Call lists.
- Shred all unnecessary documents that contain account numbers, Social Security numbers, or Medicare numbers. This also includes empty medication containers, such as pill bottles from the pharmacy.
- Americans are entitled to one free credit report every twelve months from each of the three credit reporting agencies. Tell your parents to pull a report every four months to make sure nothing looks awry.
19. My 401(k) offers a Roth option. Should I contribute to it?
To Your Wealth - July 15, 2019
Deciding whether to contribute to a Roth 401(k) or Traditional 401(k) is always a tax question. First you must understand the difference: Traditional 401(k) money goes in tax-deferred and is taxed when withdrawn whereas Roth 401(k) money goes in after-tax and comes out tax-free in retirement. Consider going the traditional route if deferring your income drops you into a lower tax bracket or makes you eligible for certain tax benefits such as the Child Tax Credit. Otherwise, the Roth 401(k) is a great place to park your money. If you’re phased out of making Roth IRA contributions, consider directing money to your Roth 401(k) since there is no phase-out. Another reason to contribute to your Roth 401(k) is that once you leave the job you can roll the Roth money into a Roth IRA. Doing so will avoid required minimum distributions levied on 401(k)s and Traditional IRAs.
Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.