Not part of a group? You may have to go it alone

You may have group health insurance or be able to buy it through your employer. Group insurance is most commonly offered through employers. It is also offered through some civic groups and other organizations (e.g., auto clubs, chambers of commerce). A single policy covers the medical expenses of a group of people. All eligible members of the group can be covered by a group policy regardless of age or physical condition. The premium for group insurance is calculated based on characteristics of the group as a whole, such as average age and degree of occupational hazard. It’s generally less expensive than individual insurance.

If you can’t join a group, consider buying individual insurance. Unlike group insurance, individual insurance is purchased directly from an insurance company or agent. When you apply, you are evaluated in terms of how much risk you present to the insurance company. Your risk potential will determine whether you qualify for insurance and how much it will cost, depending on state laws. You must pay the full premiums yourself.

If you have to go it alone, you can shop for health insurance coverage through state-based Affordable Insurance Marketplaces. You can compare health plans according to price and quality, and ultimately purchase an affordable plan that best meets your health insurance needs.

Know what’s out there

The cost and range of protection that your health insurance provides will depend on your insurance provider and the particular policy you purchase. You may have comprehensive health insurance that involves several types of coverage, or basic coverage that includes hospital, surgical, and physicians’ expenses. In addition, major medical coverage is necessary in the event of a catastrophic accident or illness. Many plans also cover prescriptions, mental health services, and other health-related activities (e.g., health-club memberships).

When it comes to health insurance, HMO, PPO, and POS are more than just letters. You need to know the types of health plans available so that you can make an informed decision. You can obtain health insurance through traditional insurers like Blue Cross/Blue Shield, health maintenance organizations (HMOs), preferred provider organizations (PPOs), point of service (POS) plans, and exclusive provider organizations (EPOs).

• Traditional insurers: These plans usually allow you flexibility regarding choice of doctors and other health-care providers. Some policies reimburse you for covered expenses, while others make payments directly to medical providers. You will pay a deductible and a percentage of each bill, known as coinsurance.
• HMOs: Health maintenance organizations cover only medical treatment provided by physicians and facilities within their networks. You must choose a primary care physician, who will either approve or deny any requests to see a specialist. You usually pay a fixed monthly fee for health-care coverage, as well as small co-payments (e.g., $10 for each office visit and prescription).
• PPOs: Preferred provider organizations do not require members to seek care from PPO physicians and hospitals, but there is usually strong financial incentive to do so (in terms of percentage of reimbursement). You usually pay a fixed monthly fee for health-care coverage, as well as small co-payments (e.g., $10 for each office visit and prescription).
• POSs: Point of service plans combine characteristics of the HMO and PPO. You must choose a primary care physician to be responsible for all of your referrals within the POS network. Although you can choose to go outside the network with this type of plan, your health care will be covered at a lower level.
• EPOs: Exclusive provider organizations are basically PPOs with one important difference: EPOs provide no coverage for non-network care.

Read your contract

You should have a basic understanding of what your policy does and does not cover. This may help you prevent an unexpected medical bill from arriving in your mailbox, because you’ll know ahead of time, for instance, whether or not liposuction is covered. You must read your policy carefully, particularly the section on limitations and exclusions. The specifics will vary from policy to policy. In general, though, most policies will at least mention the following:

• Pre-existing conditions: An illness or injury that began or occurred before you obtained coverage under the policy. The Affordable Care Act eliminated the ability of a health insurance policy or plan covering essential health conditions to deny coverage for pre-existing conditions. However, pre-existing conditions may be imposed for other than essential health benefits.
• Nonduplication of benefits: Benefits will not be paid for amounts reimbursed by other insurance companies.

Your health insurance policy should also address the following issues:

• Deductible: The amount that you must pay before insurance coverage begins (usually an annual figure
• Coinsurance: The portion of each medical bill for which you are responsible
• Co-payment: The fixed fee that you pay for each doctor visit or prescription
• Family coverage: Many group plans allow you to cover your spouse and dependents for an increased premium
• Out-of-pocket maximum: This provision is designed to limit your liability for medical expenses in the calendar year; you won’t have to make coinsurance payments in excess of this figure
• Benefit ceiling: The maximum lifetime payout under the insurance policy, usually at least $1 million

In conclusion, having health insurance is an important aspect of every person’s life and financial plan.  There are many options to choose from and being armed with some basic information can help you evaluate what is right for you and your situation.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

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Fortunately, there’s the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA). COBRA can prove to be a real lifesaver for you and your family when your health coverage is jeopardized. You may also benefit from the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which took some further steps toward health-care reform.

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) may help you continue your health insurance coverage for a time

COBRA is a federal law designed to protect employees and their dependents from losing health insurance coverage as a result of job loss or divorce. If you and your dependents are covered by an employer-sponsored health insurance plan, a provision of COBRA entitles you to continue coverage when you’d normally lose it. Most larger employers (20+ employees) are required to offer COBRA coverage.

As an employee, you’re entitled to COBRA coverage only if your employment has been terminated for any reason other than gross misconduct or if your hours have been reduced. However, your spouse and dependent children may be eligible for COBRA benefits if they’re no longer entitled to employer-sponsored benefits because of divorce, death, or certain other events.

Unfortunately, you can’t continue your health insurance coverage forever. You can continue your health insurance for 18 months under COBRA if your employment has been terminated or if your work hours have been reduced. If you’re entitled to COBRA coverage for other qualifying reasons, you can continue your coverage for 36 months.

• Divorce: If your former spouse maintained family health coverage through work (and works for a company with at least 20 employees), you may continue this group coverage for up to 36 months after the divorce or legal separation. You’ll have to pay for this coverage, though. Your cost of continuing coverage cannot exceed 102 percent of the employer’s cost for the insurance. COBRA coverage will terminate sooner than 36 months if you remarry or obtain coverage under another group health plan.
• Company goes out of business: Unfortunately, you may be out of luck here. If your company goes out of business and no longer has a group health insurance policy in force, then COBRA coverage will not be available. (A possible exception involves union employees covered by a collective bargaining agreement.)

Keep in mind that, whatever your circumstances, your employer may require individuals who elect continuation coverage to pay the full cost of the coverage, plus a 2 percent administrative fee. However, if you’re eligible for COBRA coverage and don’t have any other health insurance, you should probably accept it. Even though you’ll pay a lot more for coverage than you did as an employee, it’s probably less than you’ll pay for individual coverage. You won’t be subject to any health screenings, tests, or other pre-existing medical condition requirements when converting to a COBRA contract. Your COBRA benefits and coverage will be identical to those provided to similarly enrolled individuals.

The Health Insurance Portability and Accountability Act of 1996 expanded COBRA

In 1996, HIPAA expanded certain COBRA provisions and created other health-care rights. In many ways, HIPAA took a significant step toward health-care reform in the United States. Some of its provisions may affect you. The major provisions of HIPAA:

• Allow workers to move from one employer to another without fear of losing group health insurance
• Require health insurance companies that serve small groups (2 to 50 employees) to accept every small employer that applies for coverage
• Increase the tax deductibility of medical insurance premiums for the self-employed
• Require health insurance plans to provide inpatient coverage for a mother and newborn infant for at least 48 hours after a normal birth or 96 hours after a cesarean section

For example, assume you’re pregnant and covered by a group health insurance plan at work. You decide to take a job at another firm. Under HIPAA, pregnancy cannot be considered a pre-existing condition for a woman who’s changing jobs if she was previously covered by a group health insurance plan. So if you had insurance at your old job, you can’t be denied health insurance coverage at your new job simply because you’re pregnant.

However, many companies require you to be employed for 30 days or more before you become eligible for coverage. If you are nearing the end of your pregnancy, and that requirement poses a problem for you, you may be eligible for coverage under COBRA through your former employer.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Health Insurance and COBRA: Sometimes You Can Take It with You appeared first on Austin Asset.

Let your Austin Asset team relieve you of these stresses by determining competitive prices across the local dealer market, providing greater transparency for surprise costs, and connecting you with our network of trusted dealers for both purchase and continuing maintenance needs.

When discussing the car buying process, we’re often met with a common question—to buy or to lease? Unfortunately, there isn’t a definitive answer. Buying or leasing a vehicle is a decision dependent entirely on your needs and preferences. Here are a few questions for you to ask yourself to help clarify the process:

How long will you keep the car?

Leases typically run two to four years, a great choice if you’d prefer to drive a new car every few years. If you’d prefer another option for equity, consider buying.

How large of a monthly payment can you afford?

When you buy a car, your payments are based on the total purchase price of that car. With leasing, however, your payments are based on the car’s expected decrease in value over the term of the lease (i.e., its depreciation). The lease payments may be low enough to put you behind the wheel of your dream car, without the need to place a down payment instead providing your first payment and a security deposit.

How will you treat the car?

Analyze your driving habits. A typical lease will include 12,000 to 15,000 miles per year. If you exceed this amount, you may have to pay extra (e.g., $0.15 per mile) at the end of your lease. So, if you travel great distances for work or intend to take any cross-country trips, buying may be the better option.

Also, consider your surroundings. Most lease agreements allow only normal wear and tear. If you know you are tough on your car or live in a neighborhood with street parking only, a lease may not be the best choice. Remember, if you lease a car, you must pay for any non-warranty repairs (e.g., a dent in the door) which benefit the leasing agency, not you. When you buy a car, it’s yours to do with as you please—you decide if the dent in the door gets fixed.

When you’re ready to move forward with purchasing your vehicle, we will provide you with information and resources to make the best decision but, our true aim is to ensure that you have a positive experience and lessen any burden so that you can truly enjoy today.

The post You Drive, We’ll Navigate: The Car Buying Process appeared first on Austin Asset.

College costs

According to The College Board’s 2018 Trends in College Pricing report, the average annual cost for the 2018/2019 academic year at a four-year public college is $25,890 for an in-state student and $41,950 for an out-of-state student. If attending a four-year private college, the average increases to $52,500 and is unaffected by student residency. These figures include tuition and fees, room and board, books, transportation, and personal expenses.

It’s likely that costs will continue to rise, but by how much? Annual increases in the range of 3% to 6% would be in keeping with historical trends, but the actual percentage increase could vary by year and by type of college (i.e., public or private).

How will I pay for it?

Many parents save less than 100% of their child’s education costs before college. Typically, they set aside enough to make a down payment in the same way you might purchase a home. Then, when classes begin, parents often supplement this down payment with one or more of the following:

• Current income
• Federal and college student-based financial aid (e.g., student loans, grants, scholarships, and/or work-study)
• Investments (e.g., 529 plan, mutual funds)
• Child’s savings and/or earnings from a part-time job
• Federal Parent PLUS Loan
• Home equity loan or other private loans
• Gifts from grandparents

How much should I save?

Start by estimating your child’s costs for four years of college. Then use a financial calculator to determine how much money you’ll need to put aside each month or year to meet your goal. In many cases, the amount of money you set aside really comes down to how much you can afford to save.

Start saving as early as possible

Perhaps the most challenging time to start a college savings program is when your child is young. New parents face many financial demands that always seem to take over—the possible loss of one income, child-related spending, the competing need to save for a house or car, or the demands of your own student loans. Yet, this is when you should start saving.

When your child is young, you have time to select investments that have the potential to outpace college cost increases, though investments that offer higher potential returns may involve greater risk of loss. This table shows what a consistent monthly investment might grow to look like:

Note: Table assumes an annual 6% return. This is a hypothetical example and is not intended to reflect the actual performance of any investment. Rates of return will vary over time, particularly for long-term investments. Investments with the potential for higher rates of return also carry a greater degree of risk of loss. Fees and expenses are not considered and would reduce the performance shown if included.

You’ll also benefit from compounding, which is the process of earning additional returns on the interest and/or capital gains that you reinvest along the way. With regular investments spread over many years, you may be surprised at how much you might be able to accumulate in their college fund. If you can’t save hundreds of dollars every month early on, start with whatever amount is comfortable and increase it as you’re able. Remember, every dollar makes a difference in your child’s future and can be a huge help when looking to prepare your child for college.

The post Preparing Your Child (and Your Finances) for College appeared first on Austin Asset.

A recent study from Fidelity estimates that an average 65-year-old couple retiring this year will need to have $295,000 in today’s dollars for future medical costs.

So what is an effective way to save for medical expenses in retirement? Consider a Health Savings Account (HSA).

1) Contributions are pre-tax and avoid FICA tax if made through payroll deduction.
2) There are no income phaseouts for contributions and withdrawals from an HSA.
3) Some HSA providers allow you to invest in a variety of investment vehicles, including stocks and bonds.
4) The money remains in your HSA year over year, and you can take it with you from employer to employer or when you retire.
5) You will not pay tax on your HSA contributions and earnings if you use it to pay for qualified medical expenses.
6) You can use the money for nonmedical expenses after 65, but you will be taxed at ordinary income rates. However, If you are under age 65 and use it for nonmedical expenses, you will pay ordinary income tax rates on the withdrawal AND a 20% penalty.
7) HSA’s don’t have required minimum distributions when you reach 70 1/2.

So if you can afford to pay for current medical expenses from your savings or cash flow, your Health Savings Account can also serve as an effective retirement savings vehicle.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Should You Dip into Your HSA Now? Or Save it for Retirement? appeared first on Austin Asset.

Retirement plans established under Section 403(b) of the Internal Revenue Code, commonly referred to as 403(b) plans or “tax-sheltered annuities,” have become a popular type of employer-sponsored retirement plan.

What is a 403(b) plan?

A 403(b) plan is a retirement savings plan, sponsored by a tax-exempt organization or public school, that offers significant tax benefits while helping you plan for the future. You contribute to the plan via payroll deduction, which can make it easier for you to save for retirement. One important feature of a 403(b) plan is your ability to make pre-tax contributions to the plan. Pre-tax means that your contributions are deducted from your pay and transferred to the 403(b) plan before federal (and most state) income taxes are calculated. This reduces your current taxable income — you don’t pay income taxes on the amount you contribute, or any investment gains on your contributions until you receive payments from the plan.

You may also be able to make Roth contributions to your 403(b) plan. Roth 403(b) contributions are made on an after-tax basis, just like Roth IRA contributions. Unlike pre-tax contributions to a 403(b) plan, there’s no up-front tax benefit — your contributions are deducted from your pay and transferred to the plan after taxes are calculated. But a distribution from your Roth 403(b) account is entirely free from federal income tax if the distribution is qualified. In general, a distribution is qualified only if it satisfies both of the following requirements:

• It’s made after the end of a five-year waiting period
• The payment is made after you turn 59½, become disabled, or die

Generally, you can contribute up to $19,500 ($26,000 if you’re age 50 or older) to a 403(b) plan in 2020 (unless your plan imposes lower limits). If your plan permits, and you have 15 or more years of service, you may also be able to make special catch-up contributions to the plan, in addition to the age 50 catch-up contribution.

If your plan allows Roth 403(b) contributions, you can split your contribution between pre-tax and Roth contributions any way you wish.

When can I contribute?

While a 403(b) plan can make you wait up to a year to participate, many plans let you to begin contributing with your first paycheck. Some plans also provide for automatic enrollment. If you’ve been automatically enrolled, make sure to check that your default contribution rate and investments are appropriate for your circumstances.

What about employer contributions?

Employers don’t have to contribute to 403(b) plans, but many will match all or part of your contributions. Try to contribute as much as necessary to get the maximum matching contribution from your employer. This is essentially free money that can help you pursue your retirement goals. Note that your plan may require up to six years of service before your employer matching contributions are fully vested (that is, owned by you), although most plans have a faster vesting schedule.

Should I make pre-tax or Roth contributions (if allowed)?

If you think you’ll be in a higher tax bracket when you retire, Roth 403(b) contributions may be more appealing, since you’ll effectively lock in today’s lower tax rates (and future withdrawals will generally be tax-free). However, if you think you’ll be in a lower tax bracket when you retire, pre-tax 403(b) contributions may be more appropriate because your contributions reduce your taxable income now. Your investment horizon and projected investment results are also important factors.

What else do I need to know?

• Your contributions, pre-tax and Roth, are always 100% vested (i.e., owned by you).
• If your plan allows loans, you may be eligible to borrow up to one half of your vested 403(b) account (to a maximum of $50,000) if you need the money. Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, loans of up to 100,000 or 100% of your vested account balance may be allowed between March 27, 2020, and September 22, 2020.
• You may also be able to make a hardship withdrawal if you have an immediate and heavy financial need. But this should be a last resort — hardship distributions are generally taxable to you.
• Distributions from your plan before you turn 59½ (55 in some cases), may be subject to a 10% early distribution penalty unless an exception applies. Due to the CARES Act, penalty-free withdrawals of up to $100,000 may be allowed in 2020 for qualified individuals affected by COVID-19. Individuals will be able to spread the associated income over three years for income tax purposes and will have up to three years to reinvest withdrawn amounts.
• You may be eligible for an income tax credit of up to $1,000 for amounts you contribute, depending on your income.
• Your assets are generally fully protected in the event of your, or your employer’s, bankruptcy.
• While your participation in a 403(b) plan has no impact on your ability to contribute to an IRA (Roth or traditional), it could impact your ability to make deductible contributions to a traditional IRA.
• Many 403(b) plans let you direct the investment of your account. Your employer provides a choice of funding arrangements (typically, mutual funds or annuity contracts issued by an insurance company). But it’s your responsibility to choose the investments most suitable for your retirement objectives.

If you missed the first article in our three-part series about 401(k) plan basics, you can find it here.

Come back to learn about Defined Benefit Plans.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post 403(b) Plans: The Basics appeared first on Austin Asset.

How QCDs work

In order to make a QCD, you simply instruct your IRA trustee to make a distribution directly from your IRA (other than SEP and SIMPLE IRAs) to a qualified charity. The distribution must be one that would otherwise be taxable to you. You can exclude up to $100,000 of QCDs from your gross income each year. And if you file a joint return, your spouse (if 70½ or older) can exclude an additional $100,000 of QCDs. Note: You don’t get to deduct QCDs as a charitable contribution on your federal income tax return — that would be double-dipping.

QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA, just as if you had received an actual distribution from the plan. However, distributions that you actually receive from your IRA (including RMDs) and subsequently transfer to a charity cannot qualify as QCDs.

Assume that your RMD for 2021, which you’re required to take no later than December 31, 2021, is $25,000. You receive a $5,000 cash distribution from your IRA in February 2021, which you then contribute to Charity A. In June 2021, you also make a $15,000 QCD to Charity A. You must include the $5,000 cash distribution in your 2021 gross income (but you may be entitled to a charitable deduction if you itemize your deductions, a strategy that may be less beneficial now than prior to 2018 due to passage of the Tax Cuts and Jobs Act). You exclude the $15,000 of QCDs from your 2021 gross income. Your $5,000 cash distribution plus your $15,000 QCD satisfy $20,000 of your $25,000 RMD for 2021. You’ll need to withdraw another $5,000 no later than December 31, 2021, to avoid a penalty.

Assume you turn 72 in the second half of 2021. You must take your first RMD (for 2021) no later than April 1, 2022. You must take your second RMD (for 2022) no later than December 31, 2022. Assume each RMD is $25,000. You don’t take any cash distributions from your IRA in 2021 or 2022. On March 31, 2022, you make a $25,000 QCD to Charity B. Because the QCD is made prior to April 1, it satisfies your $25,000 RMD for 2021. On December 31, 2022, you make a $75,000 QCD to Charity C. Because the QCD is made by December 31, it satisfies your $25,000 RMD for 2022. You can exclude the $100,000 of QCDs from your 2022 gross income.²

As indicated earlier, a QCD must be an otherwise taxable distribution from your IRA. If you’ve made nondeductible contributions, then normally each distribution carries with it a pro-rata amount of taxable and nontaxable dollars. However, a special rule applies to QCDs — the pro-rata rule is ignored and your taxable dollars are treated as distributed first.

Assume you have a single traditional IRA with a current value of $100,000, which includes $10,000 of nondeductible contributions. Therefore, you have a taxable balance of $90,000 and a nontaxable balance of $10,000. If you were to make a $5,000 withdrawal from your IRA, nine-tenths ($10,000/100,000) of your distribution, or $4,500, would be taxable and one-tenth ($10,000/100,000), or $500, would be nontaxable. However, if you make a $5,000 QCD, the entire $5,000 amount will be considered to come from your $90,000 taxable balance.

If you have multiple IRAs, they are aggregated when calculating the taxable and nontaxable portion of a distribution from any one IRA.

Assume you have two traditional IRAs. IRA One has a value of $50,000 and does not include any nondeductible contributions. IRA Two also has a $50,000 value but includes $10,000 of nondeductible contributions. For tax purposes, you are treated as owning a single traditional IRA with a value of $100,000 and a nontaxable balance of $10,000. If you were to make a withdrawal of $50,000 from IRA Two, nine-tenths ($10,000/100,000) of your distribution, or $45,000, would be taxable and one-tenth ($10,000/100,000), or $5,000, would be nontaxable. However, if you make a $5,000 QCD from IRA Two, the entire $5,000 amount will be considered to come from your $90,000 taxable balance.

RMDs are calculated separately for each traditional IRA you own, but may be taken from any of your IRAs.

Your QCD cannot be made to a private foundation, donor-advised fund, or supporting organization [as described in IRC Section 509(a)(3)]. Further, the gift cannot be made in exchange for a charitable gift annuity or to a charitable remainder trust.

Why are QCDs important?

Without this special rule, taking a distribution from your IRA and donating the proceeds to a charity would be a bit more cumbersome and possibly more expensive. You would request a distribution from the IRA and then make the contribution to the charity yourself. You’d include the distribution in gross income and then take a corresponding income tax deduction for the charitable contribution. But due to IRS limits, the additional tax from the distribution may be more than the charitable deduction. And due to much higher standard deduction amounts ushered in by the Tax Cuts and Jobs Act passed in 2017, itemizing deductions may have become even less beneficial in 2018 and beyond, rendering QCDs even more potentially appealing.

QCDs avoid all this by providing an exclusion from income for the amount paid directly from your IRA to the charity — you don’t report the IRA distribution in your gross income, and you don’t take a deduction for the QCD.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

¹Beginning after 2019, if you make deductible contributions to an IRA for the year you reach age 70½ or beyond, this could reduce the allowable amount of your QCD.
²Legislation passed at the end of 2019 raised the RMD age to 72 (from age 70½) beginning January 1, 2020. If you reach age 72 before July 1, 2021, you will need to take an RMD by December 31, 2021.

The post Authentic Advice Blog: Charitable Contributions from IRAs appeared first on Austin Asset.

Know what your financial needs are

The first step is to determine your financial needs for each goal. Answering the following questions can help you get started:

For retirement:

• How many years until you retire?
• Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
• How much do you expect to receive in Social Security benefits? (One way to get an estimate of your future Social Security benefits is to use the benefit calculators available on the Social Security Administration’s website, www.ssa.gov. You can also sign up for a My Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor’s, and disability benefits.)
• What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
• Do you or your spouse expect to work part-time in retirement?

For college:

• How many years until your child starts college?
• Will your child attend a public or private college? What’s the expected cost?
• Do you have more than one child whom you’ll be saving for?
• Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
• Do you expect your child to qualify for financial aid?
• Do you plan to cover the entire cost, or would you like the child to bear some of the responsibility?

Many on-line calculators are available to help you predict your retirement income needs and your child’s college funding needs.

Figure out what you can afford to put aside each month

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.

Retirement takes priority

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of potential tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan.

If possible, save for your retirement and your child’s college at the same time

Ideally, you’ll want to try to pursue both goals at the same time. The more money you can save for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8% annually, you would have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment. Investment returns will fluctuate and cannot be guaranteed.)

If you are unsure about how to allocate funds between retirement and college, a professional financial planner may be able to help. This person can also help you select appropriate investments for each goal. Remember, just because you are pursuing both goals at the same time doesn’t necessarily mean that the same investments will be suitable.  It may be appropriate to treat each goal     independently.

Help! I can’t meet both goals

If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll probably have to make some sacrifices. Here are some suggestions:

• Defer retirement: The longer you work, the more money you will earn and the later you’ll need to dip into your retirement savings.
• Work part-time during retirement.
• Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now to have more money later. Or, you may want to consider cutting back in retirement.
• Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). Note that no investment strategy can guarantee success.
• Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
• Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations.
• Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead of four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

Can retirement accounts be used to save for college?

Yes. Should they be? That depends on your family’s circumstances. We generally discourage paying for college with funds from a retirement account; even more so if using retirement funds for a child’s college education will leave you with no funds in your retirement years.

With that said, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw).

However, with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10% penalty on any withdrawals made before you reach age 59½ (age 55 or 50 in some cases), even if the money is used for college expenses.   There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)

College is a big hurdle, and if history is any indication of what is to come, costs could continue to rise.  As with any goal, consistently saving is usually the best strategy.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Saving for Retirement and a Child’s Education at the Same Time appeared first on Austin Asset.

Understand your employer-sponsored retirement plan

Before you can take advantage of your employer’s plan, you need to understand how these plans work. Read everything you can about the plan and talk to your employer’s benefits officer. You can also talk to a financial planner, a tax advisor, and other professionals. Recognize the key features that many employer-sponsored plans share:

• Your employer automatically deducts your contributions from your paycheck. You may never even miss the money — out of sight, out of mind.
• You decide what portion of your salary to contribute, up to the legal limit. And you can usually change your contribution amount on certain dates during the year or as needed.
• With 401(k), 403(b), 457(b), SARSEPs, and SIMPLE plans, you contribute to the plan on a pre-tax basis. Your contributions come off the top of your salary before your employer withholds income taxes.
• Your 401(k), 403(b), or 457(b) plan may let you make after-tax Roth contributions — there’s no up-front tax benefit but qualified distributions are entirely tax free.
• Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.
• Your funds grow tax deferred in the plan. You don’t pay taxes on investment earnings until you withdraw your money from the plan.
• You’ll pay income taxes (and possibly an early withdrawal penalty) if you withdraw your money from the plan.
• You may be able to borrow a portion of your vested balance (up to $50,000) at a reasonable interest rate.
• Your creditors cannot reach your plan funds to satisfy your debts.

Contribute as much as possible

The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to the legal limit (or plan limits, if lower). If you need to free up money to do that, try to cut certain expenses.

Why put your retirement dollars in your employer’s plan instead of somewhere else? One reason is that your pre-tax contributions to your employer’s plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan — a big advantage if you’re in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you’ll pay income taxes on $90,000 instead of $100,000. (Roth contributions don’t lower your current taxable income but qualified distributions of your contributions and earnings — that is, distributions made after you satisfy a five-year holding period and reach age 59½, become disabled, or die — are tax free.)

Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren’t taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your employer’s plan. You should end up with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.

For example, say you participate in your employer’s tax-deferred plan (Account A). You also have a taxable investment account (Account B). Each account earns 6% per year. You’re in the 24% tax bracket and contribute $5,000 to each account at the end of every year. After 40 years, the money placed in a taxable account would be worth $567,680. During the same period, the tax-deferred account would grow to $820,238. Even after taxes have been deducted from the tax-deferred account, the investor would still receive $623,381. (Note: This example is for illustrative purposes only and does not represent a specific investment.)

Capture the full employer match

If you can’t max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are basically free money once you’re vested in them (check with your employer to find out when vesting happens). By capturing the full benefit of your employer’s match, you’ll be surprised how much faster your balance grows. If you don’t take advantage of your employer’s generosity, you could be passing up a significant return on your money.

For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is 50 cents on the dollar up to 6% of your salary. Each year, you contribute 6% of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer.

Evaluate your investment choices carefully

Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer’s plan could be one of your keys to a comfortable retirement. That’s because over the long term, varying rates of return can make a big difference in the size of your balance.

Note: Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

Research the investments available to you. How have they performed over the long term? How much risk will they expose you to? Which ones are best suited for long-term goals like retirement? You may also want to get advice from a financial professional (either your own, or one provided through your plan). He or she can help you pick the right investments based on your personal goals, your attitude toward risk, how long you have until retirement, and other factors. Your financial professional can also help you coordinate your plan investments with your overall investment portfolio.

Know your options when you leave your employer

When you leave your job, your vested balance in your former employer’s retirement plan is yours to keep. You have several options at that point, including:

• Taking a lump-sum distribution. Before choosing this option, consider that you’ll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you’re giving up the continued potential of tax-deferred growth.
• Leaving your funds in the old plan, growing tax deferred. (Your old plan may not permit this if your balance is less than $5,000, or if you’ve reached the plan’s normal retirement age — typically age 65.) This may be a good idea if you’re happy with the plan’s investments or you need time to decide what to do with your money.
• Rolling your funds over to an IRA or a new employer’s plan (if the plan accepts rollovers). This may also be an appropriate move because there will be no income taxes or penalties if you do the rollover properly (your old plan will withhold 20% for income taxes if you receive the funds before rolling them over, and you’ll need to make up this amount out of pocket when investing in the new plan or IRA). Plus, your funds continue to potentially benefit from tax-deferred growth.

In closing, you have several options to choose from when saving for retirement.  More often than not, starting with your employer-sponsored plan is a good starting point.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Taking Advantage of Employer-Sponsored Retirement Plans appeared first on Austin Asset.

To do that, we follow a repeatable and straightforward 5 step process.

Step One: Buy new or used

We can write an entire article on the cost savings of used vs. new; instead, we will state that you can potentially save money buying used vs. new. Mainly due to how quickly a new car depreciates relative to a used car.

For example, if you buy a new car for $50,000 and sell it in three years for $30,000, that new car has cost you $20,000 in depreciation.

On the flip side, if you buy a car used for $30,000 and sell it three years later for $20,000, then that used car has cost you $10,000 in depreciation.

There are exceptions to this rule, as some brands are known for holding their value and not depreciating at the same rate relative to others.

Step Two: Know what you want

Once you have decided new or used, the next step is to compile the details of the specific car you want. Typically, you will need:

• Make, Model, Year
• Exterior and interior color
• Trim level
• Must have options

Step Three: Determine the fair price

We use Costco’s auto website to build the exact car and see the invoice price.  This is the price you are wanting to get or beat at the dealership.

Pro tip: You do not have to be a Costco member to use the tool.

Step Four: Compare dealerships online

We encourage you to look at 2-3 dealerships online to see inventory and online pricing.

Once you identify what you are looking for, call the dealership directly, and ask for their best and final price.

They commonly will ask you what you are trying to beat. We usually provide a number well below the dealership’s online price or the invoice price. And, always ask them to send it to you in writing via e-mail.

Step Five (optional): Trade-In

We can’t stress this enough, negotiate a trade-in separate from the purchase.

We use the NADA Guide to determine the fair trade-in value, and our goal is to get between average and clean trade.

While it is never guaranteed you will get the lowest price possible, but following these five steps could increase your odds of getting a fair one. If you’ve been wondering how to get the best deal on a new car, follow the steps above and your odds will go way up!

The post 5 Steps for a Fair Price at a Dealership appeared first on Austin Asset.

Long-term care: the odds against it aren’t long at all

Maybe you think that you’ll be the lucky one, that your parents won’t need long-term care, but the statistics indicate that we’re living longer and the need for long-term care is more likely. Also, parents living alone (especially women, who have a longer life expectancy then men), are more likely to need long-term care without a spouse or partner available to help out.

The cost of long-term care isn’t low, either

Long-term care can also be expensive. What’s more, Medicare, Medigap, managed-care programs like health maintenance organizations, and indemnity medical insurance plans don’t pay for long-term nursing home care or for assisted living. Although Medicaid, a state-administered federal welfare program, will cover the costs of long-term care, your parents must be legitimately impoverished to be eligible for it.

If they’re not prepared, your parents might find their lifetime savings and their assets quickly depleted by the cost of paying for long-term health care. As their child, you’ll want to help them protect those assets from being eroded by long-term care costs. One solution to this dilemma might be long-term care insurance (LTCI).

Help is on the way

Generally, LTCI helps pay for the care of an individual who can no longer independently perform the basic activities of daily living, such as bathing, dressing, eating, and toileting, due to a cognitive disorder, illness, or injury. A comprehensive policy will cover skilled, intermediate, and custodial care in a variety of settings, including nursing homes, assisted-living facilities, adult day-care centers, or the insured’s own home.

Who most likely needs the help?

Deciding whether to purchase LTCI will take some careful consideration. LTCI might be right for a parent if at least some of the following criteria apply:

• He or she is between the ages of 40 and 84
• There’s a family history of Alzheimer’s disease
• He or she has significant assets to preserve as an inheritance or to gift to charity
• He or she has an income from employment or investments in addition to Social Security
• The cost of the premiums will not exceed 5 to 7 percent of your parent’s annual income (or yours, if you’re paying the premiums)
• He or she is healthy enough to be insurable

The cost of LTCI policies can vary widely, depending on many factors, including the coverage selected and the age and health of your parents. The younger and healthier they are, the less expensive the insurance will be–but the longer they might pay for it before they really need it.  Regardless of what stage you or your parents are in, it is a conversation worth having.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Do Your Parents Need Long-Term Care Insurance? appeared first on Austin Asset.

You may be counting on funds from a defined benefit plan to help you achieve a comfortable retirement. Often referred to as traditional pension plans, defined benefit plans promise to pay you a specified amount at retirement.

To help you understand the role a defined benefit plan might play in your retirement savings strategy, here’s a look at some basic plan attributes. But since every employer’s plan is a little different, you’ll need to read the summary plan description, or SPD, provided by your company to find out the details of your own plan.

What are defined benefit plans?

Defined benefit plans are qualified employer-sponsored retirement plans. Like other qualified plans, they offer tax incentives both to employers and to participating employees. For example, your employer can generally deduct contributions made to the plan. And you generally won’t owe tax on those contributions until you begin receiving distributions from the plan (usually during retirement). However, these tax incentives come with strings attached–all qualified plans, including defined benefit plans, must comply with a complex set of rules under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.

How do defined benefit plans work?

A defined benefit plan guarantees you a certain benefit when you retire. How much you receive generally depends on factors such as your salary, age, and years of service with the company.

Each year, pension actuaries calculate the future benefits that are projected to be paid from the plan and ultimately determine what amount, if any, needs to be contributed to the plan to fund that projected benefit payout. Employers are normally the only contributors to the plan. But defined benefit plans can require that employees contribute to the plan, although it’s uncommon.

You may have to work for a specific number of years before you have a permanent right to any retirement benefit under a plan. This is generally referred to as “vesting.” If you leave your job before you fully vest in an employer’s defined benefit plan, you won’t get full retirement benefits from the plan.

How are retirement benefits calculated?

Retirement benefits under a defined benefit plan are based on a formula. This formula can provide for a set dollar amount for each year you work for the employer, or it can provide for a specified percentage of earnings. Many plans calculate an employee’s retirement benefit by averaging the employee’s earnings during the last few years of employment (or, alternatively, averaging an employee’s earnings for his or her entire career), taking a specified percentage of the average, and then multiplying it by the employee’s number of years of service.

Note: Many defined benefit pension plan formulas also reduce pension benefits by a percentage of the amount of Social Security benefits you can expect to receive.

How will retirement benefits be paid?

Many defined benefit plans allow you to choose how you want your benefits to be paid. Payment options commonly offered include:

• A single life annuity: You receive a fixed monthly benefit until you die; after you die, no further payments are made to your survivors.
• A qualified joint and survivor annuity: You receive a fixed monthly benefit until you die; after you die, your surviving spouse will continue to receive benefits (in an amount equal to at least 50 percent of your benefit) until his or her death.
• A lump-sum payment: You receive the entire value of your plan in a lump sum; no further payments will be made to you or your survivors.

Choosing the right payment option is important because the option you choose can affect the amount of benefit you ultimately receive. You’ll want to consider all of your options carefully, and compare the benefit payment amounts under each option. Because so much may hinge on this decision, you may want to discuss your options with a financial advisor.

What are some advantages offered by defined benefit plans?

• Defined benefit plans can be a major source of retirement income. They’re generally designed to replace a certain percentage (e.g., 70 percent) of your preretirement income when combined with Social Security.
• Benefits do not hinge on the performance of underlying investments, so you know ahead of time how much you can expect to receive at retirement.
• Most benefits are insured up to a certain annual maximum by the federal government through the Pension Benefit Guaranty Corporation (PBGC).

How do defined benefit plans differ from defined contribution plans?

Though it’s easy to do, don’t confuse a defined benefit plan with another type of qualified retirement plan, the defined contribution plan (e.g., 401(k) plan, profit-sharing plan). As the name implies, a defined benefit plan focuses on the ultimate benefits paid out. Your employer promises to pay you a certain amount at retirement and is responsible for making sure that there are enough funds in the plan to eventually pay out this amount, even if plan investments don’t perform well.

In contrast, defined contribution plans focus primarily on current contributions made to the plan. Your plan specifies the contribution amount you’re entitled to each year (contributions made by either you or your employer), but your employer is not obligated to pay you a specified amount at retirement. Instead, the amount you receive at retirement will depend on the investments you choose and how those investments perform.

Some employers offer hybrid plans. Hybrid plans include defined benefit plans that have many of the characteristics of defined contribution plans. One of the most popular forms of a hybrid plan is the cash balance plan.

What are cash balance plans?

Cash balance plans are defined benefit plans that in many ways resemble defined contribution plans. Like defined benefit plans, they are obligated to pay you a specified amount at retirement and are insured by the federal government. But they also offer one of the most familiar features of a defined contribution plan: Retirement funds accumulate in an individual account (in this case, a hypothetical account).

This allows you to easily track how much retirement benefit you have accrued. And your benefit is portable. If you leave your employer, you can generally opt to receive a lump-sum distribution of your vested account balance. These funds can be rolled over to an individual retirement account (IRA) or to your new employer’s retirement plan.

What you should do now

It’s never too early to start planning for retirement. Your pension income, along with Social Security, personal savings, and investment income, can help you realize your dream of living well in retirement.

Start by finding out how much you can expect to receive from your defined benefit plan when you retire. Your employer will send you this information every year. But read the fine print. Estimates often assume that you’ll retire at age 65 with a single life annuity. Your monthly benefit could end up to be far less if you retire early or receive a joint and survivor annuity. Finally, remember that most defined benefit plans don’t offer cost-of-living adjustments, so benefits that seem generous now may be worth a lot less in the future when inflation takes its toll.

Here are some other things you can do to make the most of your defined benefit plan:

• Read the summary plan description. It provides details about your company’s pension plan and includes important information, such as vesting requirements and payment options. Address questions to your plan administrator if there’s anything you don’t understand.
• Review your account information, making sure you know what benefits you are entitled to. Do this periodically, checking your Social Security number, date of birth, and the compensation used to calculate your benefits, since these are common sources of error.
• Notify your plan administrator of any life changes that may affect your benefits (e.g., marriage, divorce, death of a spouse).
• Keep track of the pension information for each company you’ve worked for. Make sure you have copies of pension plan statements that accurately reflect the amount of benefits you’re entitled to receive.
• Watch out for changes. Employers are allowed to change and even terminate pension plans, but you will receive ample notice. The key is, read all notices you receive.
• Assess the impact of changing jobs on your pension. Consider staying with one employer at least until you’re vested. Keep in mind that the longer you stay with one employer, the more you’re likely to receive at retirement.

In closing, when nearing retirement with a defined benefit plan, you have many options to weigh.  If you have questions, please do not hesitate to reach out to us.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

Please visit our prior two articles in this three-part series on 401(k) Basics and 403(b) Basics for further reading.

The post Understanding Defined Benefit Plans appeared first on Austin Asset.

Donate appreciated securities

If you donate a stock that has appreciated, there are two ways you can save: first, stock appreciation isn’t taxed, and second, if you itemize deductions on your tax return, you might be able to deduct the full value of the stock.

Itemize deductions every other year

The Tax Cuts and Jobs Act of 2017 (TCJA) increased the standard deduction amount dramatically, causing most taxpayers to favor the standard deduction instead of itemized deductions. Taking the standard deduction, while simplifying tax preparation, will cause you to lose any tax benefits from making charitable contributions. By grouping your charitable contributions every other year, you can itemize—and save taxes—every other year.

Donor-advised funds

High-income taxpayers who want to contribute significant amounts to their church or charity may consider a donor-advised fund. This vehicle allows the taxpayer to make a large deductible contribution to itemize that year and then instruct the donor-advised fund to release a specified annual amount to the organization in the coming years.

Qualified charitable distributions

Upon turning 70½ years old, taxpayers must begin taking Required Minimum Distributions (RMDs) from their Individual Retirement Accounts (IRAs). These distributions are taxable and must be taken from the account even if the taxpayer does not need the money for fundamentals. One way to reduce or eliminate the taxes is to make a Qualified Charitable Distribution (QCD) directly from your IRA to your chosen charity or non-profit as QCDs are not taxable and can satisfy part (or all) the annual RMD requirement.

The post Tactical Giving: Charitable Contributions and Tax Savings Strategies appeared first on Austin Asset.

If the latest massive data breach has you wondering if there’s something you can do to protect yourself — there is. The first option is to take the reactive approach and simply monitor your credit. The second is to be more proactive and freeze your credit, making it very difficult for anyone other than you to take out credit in your name. This means even if a criminal obtains enough information to open an account, they’ll have a number of obstacles preventing them from using it.

Under the Economic Growth, Regulatory Relief, and Consumer Protection Act—effective since September 2018—you can freeze your credit free of charge. This began in 2017 when consumer advocates called on Congress to provide free access as, previously, each of the three credit bureaus could charge for the service and to unfreeze or “thaw” credit (useful for anything requiring a credit check).

WHAT DOES FREEZING MY CREDIT DO?

When you freeze your credit, the credit reporting bureaus can’t give any information to anyone who makes an inquiry about you. Typically, businesses inquire about your credit when you, or someone posing as you, attempts to open a new credit card, buy a car, or rent an apartment. The credit check helps the business determine if they want to lend or rent to you and can help set your rates and lending terms for loans and credit cards.
If your credit is frozen, the business can’t get any information about you which typically stops the process and means a fraudster can’t open an account while using your identity.

WHY DOESN’T EVERYONE FREEZE THEIR CREDIT?

Though freezing your credit won’t guarantee safety, it’s a pretty strong defense against identity theft. You still need to unfreeze your credit if you legitimately want to apply for a loan or line of credit. While this is not a heavy burden, it does add extra steps anytime you do something that requires a credit check.
While reactive, credit monitoring is a viable alternative to a full freeze. When you pay for a credit-monitoring service, you’ll get alerts about any activity involving your credit report. This can quickly bring a potential problem to your attention—but you won’t know if someone has used your identity until after it happens.
You can always request a free copy of your credit report annually from each of the major credit bureaus and check it for any activity you don’t recognize. If you do find anything suspicious, report it immediately and take steps to lock down your credit through a fraud alert or credit freeze.

HOW DO I FREEZE MY CREDIT?

If you want to freeze your credit, you need to do it at each of the three major credit bureaus: Equifax (1-800-349-9960), TransUnion (1-888-909-8872) and Experian (1-888-397-3742). If you request a freeze, be sure to store the passwords needed to thaw your credit in a safe place.
Whether or not you choose to freeze your credit, fraudsters can still take advantage by obtaining information like your credit card number(s) or passwords to online accounts. Make sure you’re taking the proper steps to secure your information and keep it from falling into the wrong hands.

The post Why You Should Consider Freezing Your Credit appeared first on Austin Asset.

Retirement plans established under Section 401(k) of the Internal Revenue Code, commonly referred to as “401(k) plans,” have become one of the most popular types of employer-sponsored retirement plans.

Understanding 401(k) Plans

A 401(k) plan is an employer-sponsored retirement savings plan that offers significant tax benefits while helping you plan for the future. You contribute to the plan via payroll deduction, which can make it easier for you to save for retirement. One important feature of a 401(k) plan is your ability to make pre-tax contributions to the plan. Pre-tax means that your contributions are deducted from your pay and transferred to the 401(k) plan before federal (and most state) income taxes are calculated. This reduces your current taxable income — you don’t pay income taxes on the amount you contribute, or any investment gains on your contributions until you receive payments from the plan.

For example, Melissa earns $50,000 annually. She contributes $5,000 of her pay to her employer’s 401(k) plan on a pre-tax basis. As a result, Melissa’s taxable income is now $45,000. She isn’t taxed on her contributions ($5,000), or any investment earnings until she receives a distribution from the plan.

You may also be able to make Roth contributions to your 401(k) plan. Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. Unlike pre-tax contributions to a 401(k) plan, there’s no up-front tax benefit — your contributions are deducted from your pay and transferred to the plan after taxes are calculated. But a distribution from your Roth 401(k) account is entirely free from federal income tax if the distribution is qualified. (See the section below on income tax consequences for more detail.)

How much can I contribute?

Generally, you can contribute up to $19,500 ($26,000 if you’re age 50 or older) to a 401(k) plan in 2020 (unless your plan imposes lower limits). If your plan allows Roth 401(k) contributions, you can split your contribution between pre-tax and Roth contributions any way you wish.

Keep in mind that if you also contribute to another employer’s 401(k), 403(b), SIMPLE, or SAR-SEP plan, your total contributions to all of these plans — both pre-tax and Roth — can’t exceed $19,500 in 2020 ($26,000 if you’re age 50 or older). It’s up to you to make sure you don’t exceed these limits if you contribute to plans of more than one employer.

When can I contribute?

While a 401(k) plan can make you wait up to a year to participate, many plans let you begin contributing with your first paycheck. Some plans also provide for automatic enrollment. If you’ve been automatically enrolled, make sure to check that your default contribution rate and investments are appropriate for your circumstances.

Can I also contribute to an IRA?

Yes. Your participation in a 401(k) plan has no impact on your ability to contribute to an IRA (Roth or traditional). You can contribute up to $6,000 to an IRA in 2020 ($7,000 if you’re age 50 or older) if you have at least that much in earned income. Your ability to make deductible contributions to a traditional IRA may be limited if you participate in a 401(k) plan, depending on your salary level.

What are the income tax consequences of contributing to a 401(k) plan?

When you make pre-tax 401(k) contributions, you don’t pay current income taxes on those dollars. But your contributions and investment earnings are fully taxable when you receive a distribution from the plan. In contrast, Roth 401(k) contributions are subject to income taxes upfront, but qualified distributions of your contributions and earnings are entirely free from federal income tax. A distribution is qualified if it meets the following requirements:

• It is made after the end of a five-year waiting period
• It is made after you turn 59½, become disabled, or die

The five-year waiting period for qualified distributions starts on January 1 of the year you make your first Roth contribution to the 401(k) plan. For example, if you make your first Roth contribution to your employer’s 401(k) plan in December 2020, your five-year waiting period begins January 1, 2020, and ends on December 31, 2024.

Withdrawals from pre-tax accounts prior to age 59½ and non-qualified withdrawals from Roth accounts will be subject to regular income taxes and a 10% penalty tax unless an exception applies. Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, penalty-free withdrawals of up to $100,000 may be allowed in 2020 for qualified individuals affected by COVID-19. Individuals will be able to spread the associated income over three years for income tax purposes and will have up to three years to reinvest withdrawn amounts.

What about employer contributions?

Employers don’t have to contribute to 401(k) plans, but many will match all or part of your contributions. Your employer can match your Roth contributions, your pre-tax contributions, or both. But your employer’s contributions are always made on a pre-tax basis, even if they match your Roth contributions. That is, your employer’s contributions, and investment earnings on those contributions, are always taxable to you when you receive a distribution from the plan.

Try to contribute as much as necessary to get the maximum matching contribution from your employer. This is essentially free money that can help you pursue your retirement goals.

Should I make pre-tax or Roth contributions (if allowed)?

If you think you’ll be in a higher tax bracket when you retire, Roth 401(k) contributions may be more appealing, since future withdrawals, assuming they’re qualified, will generally be tax-free. However, if you think you’ll be in a lower tax bracket when you retire, pre-tax 401(k) contributions may be more appropriate because your contributions reduce your taxable income now. Your investment horizon and projected investment results are also important factors.

What happens when I terminate employment?

When you terminate employment, you generally forfeit all contributions that haven’t vested. (Vesting means that you own the contributions.) Your contributions and the earnings on them are always 100% vested. But your 401(k) plan may require up to six years of service before you fully vest in employer matching contributions and associated earnings (although some plans have a much faster vesting schedule).

When you terminate employment, you can generally leave your money in your 401(k) plan, although some plans require that you withdraw your funds once you reach the plan’s normal retirement age (typically age 65). Your plan may also “cash you out” if your vested balance is $5,000 or less, but if your payment is more than $1,000, the plan generally must roll your funds into an IRA established on your behalf, unless you elect to receive your payment in cash. [This $1,000 limit is determined separately for your Roth 401(k) account and the rest of your funds in the 401(k) plan.]

You can also roll all or part of your Roth 401(k) dollars over to a Roth IRA, and your non-Roth dollars to a traditional IRA. You may also be able to convert your non-Roth dollars to a Roth IRA, but income taxes will apply to any tax-deferred amounts in the year of conversion. You may also be able to roll your funds into another employer’s plan that accepts rollovers.

Finally, you may also be able to take a cash distribution of your contributions and earnings, as well as any vested employer amounts. However, keep in mind that any tax-deferred funds will be subject to income taxes and a possible 10% penalty tax if you’re under the age of 59½ and an exception does not apply. (As noted above, an exception to the penalty tax may be allowed in 2020 for qualified participants affected by the coronavirus for distributions up to $100,000.)

Note: When considering a rollover, to either an IRA or to another employer’s retirement plan, you should consider carefully the investment options, fees and expenses, services, ability to make penalty-free withdrawals, degree of creditor protection, and distribution requirements associated with each option.

What else do I need to know?

• If your plan allows loans, you may be eligible to borrow up to one half of your vested 401(k) account (to a maximum of $50,000) if you need the money. Due to the CARES Act, loans of up to 100,000 or 100% of your vested account balance may be allowed between March 27, 2020, and September 22, 2020.
• You may also be able to make a hardship withdrawal if you have an immediate and heavy financial need. But this should be a last resort — hardship distributions are generally taxable to you.
• Distributions from your plan before you turn 59½ (55 in some cases) may be subject to a 10% early distribution penalty unless an exception applies.
• You may be eligible for an income tax credit of up to $1,000 for amounts you contribute, depending on your income.
• Your assets are generally fully protected in the event of your, or your employer’s, bankruptcy.
• Most 401(k) plans let you direct the investment of your account. Your employer provides a menu of investment options (for example, a family of mutual funds). But it’s your responsibility to choose the investments most suitable for your retirement objectives.

Once you’re comfortable understanding 401k plans, come back to learn the basics of 403(b) plans and the unique planning opportunities they present.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post 401(k) Plans: The Basics appeared first on Austin Asset.

Thinking About Buying  A Second Home?

Before you buy a vacation home, first determine whether or not you can afford it. Even if you can rent it out or deduct part of the costs of ownership from your taxes, a vacation home is primarily a luxury, not an investment. You should buy one to add value to your life instead of to your net worth.

Buying a vacation home may be right for you if:

• Owning one has been your lifelong dream, and you can now afford it
• You’re almost ready to retire, and you plan to use the home as your primary residence in retirement (be sure to think about your future needs before you buy)
• You’ll save enough money on family vacations to offset the cost of the vacation home
• You can recover most or all of the costs of owning the home by renting it out when you’re not using it

Buying a second home may not be right for you if:

• You have to scrape the money together to afford it
• You won’t enjoy taking care of the property

How much will it cost to own a vacation home?

Buying a second home may cost more than you think. Here are some of the things you can expect to pay for:

Mortgage payment, taxes, and insurance

Unless you pay cash for your vacation home, you’ll have to pay a monthly mortgage payment. And, whether you pay cash or not, you’ll have to pay property taxes and a premium for hazard and liability insurance on the home.

Repairs, upkeep, and fees

Whether you maintain the home yourself or hire someone else to do it, you’ll have to spend money on repairing and keeping up the home. Maintenance costs can include cleaning, yard work, pool or spa maintenance, plowing, and both major and minor repairs. If you’re buying a condominium, you won’t have to maintain the exterior of your unit or do yard work, but you’ll have to pay a monthly condominium fee instead. Or, if you decide to rent your home, you may want to hire a professional management company that will charge you a fee to rent out and maintain the home.

Utilities

The amount of money you pay for electricity, heat, sewage, water, phone, and other utilities will depend on how frequently you use the vacation home. These costs can really add up, especially if you have a large number of people staying in the home.

Furnishings and supplies

Unless your vacation home comes fully furnished, expect to spend quite a bit of money on furniture, bedding, and dishes to equip your new home.

Cost of travel and entertainment

Don’t overlook the cost of traveling to and from your vacation home. You may also spend more money dining out than you would at home. Even groceries can cost more in a resort area. If you have guests, you may spend a lot on recreational activities and entrance fees to attractions, as well.

What to look for in a vacation home

Personal tastes and the reason you’re buying a second home will dictate the type of home you’ll buy and its location. For instance, if you want to get away from it all, you might want a rustic cabin. On the other hand, if you plan on inviting family members to visit or are thinking about renting out the home, you might want to think about buying a second home in a resort area where there are lots to do. Here are some things to think about when you’re choosing a vacation home.

Location

• Is the property within a three-hour drive of your home? This is important if you plan on traveling there frequently.
• Are there recreational activities nearby that appeal to both you and potential renters?
• Is the property in a scenic, desirable location such as near a lake, beach, or the mountains?
• Is the area being heavily developed? This may be a plus if you’re renting to others, a minus if you’re looking for peace and quiet.
• Will you enjoy coming back to the area year after year?

Size

• Is the home large enough to accommodate friends and family members who will want to visit?
• Is the kitchen large enough to prepare meals comfortably?
• Are the bedrooms and bathrooms adequate for the number of people who will be staying there?
• Is there adequate parking? This is especially important if you have an RV or a large boat.
• Is there room to store items that you want to leave at the home (e.g., extra clothing, equipment, or food)?

Amenities (the added extras you may want)

• Does the home have modern appliances, including a dishwasher and a washer/dryer?
• Does the home have a fireplace for chilly evenings? This is especially important in ski country.
• Does the home have a swimming pool? A hot tub? A sauna?
• Does the home have a porch (screened or unscreened) where you and your guests can relax?

Maintenance issues

• Does the home have reliable plumbing, heating, and cooling systems? Making repairs while you’re on vacation is no fun.
• Will the grounds require a lot of maintenance? Unless you enjoy it, do you really want to spend your vacation working out in the yard?
• Is the home currently in good repair, or will you have to renovate it in order to make it livable?

How do you insure a vacation home?

You’ll want to insure your vacation home against damage and loss. Your homeowner’s policy will provide liability coverage for you at your vacation home. However, most homeowners’ insurance policies provide only limited coverage for personal property at an additional residence. To insure the vacation home itself and to obtain additional personal property coverage, consider purchasing a dwelling and fire policy. There may also be insurance issues depending on how much of the year the property will be vacant. For more information, contact an insurance professional.

What about renting your home to others?

If you want to rent your vacation home to others, keep the costs in mind. For instance, if you hire an experienced real estate rental broker who is familiar with rental homes and the rental market in which your vacation home is located, you’ll have to pay a fee. If you go it alone, you’ll have to pay for advertising, for travel to the property to show it to prospective tenants, and for an attorney to draw up leases.

If you plan to rent your vacation home for several short periods during the peak rental season (e.g., weekly for a ski chalet), you’ll want to budget for greater vacancy periods. And since short-term rentals tend to place greater wear and tear on a property, you’ll need to budget for greater repair costs.

On the plus side, renting your vacation home to other people when you’re not using it can help defray the costs associated with owning the home and generate income for you.

What are the income tax consequences of owning a second or vacation home?

The income tax treatment of your vacation home depends on how many days you rent it to others, and other factors.

Property is for your personal use only or is rented to others for less than 15 days per year

If your second home is for your personal use only or is rented to others for less than 15 days per year, the income tax treatment is straightforward. If you meet the requirements, you may deduct the following items:

• Property taxes
• Qualified residence interest
• Casualty loss deductions

Tip: Rental income received from such a home is not subject to tax.

Caution: Because you don’t report the rental income generated from this home, you can’t deduct the expenses related to the rental.

Unlike the sale of your principal residence, you aren’t allowed a capital gain exclusion when you sell a vacation home or second home. However, a home that is currently a vacation home may qualify as your principal residence in as little as two years.

Property is rented out for 15 days or more during the year

When you rent out your home for more than 15 days during the year, things can get more complicated. The tax treatment of your vacation home now depends on how much time is allotted to personal use (as opposed to rental use).

If you rent the home out for 15 days or more during the year, and your personal use of the home exceeds the greater of 14 days during the year or 10 percent of the days rented, then the property is considered a vacation home for tax purposes. The tax treatment is as follows:

• Rental income: All rental income is reportable.
• Rental expenses: Rental expenses must be divided between personal use and rental use of the property. Deductible expenses, such as insurance, repairs, utilities, and depreciation, are generally limited to the amount of income generated by the property.
• Other deductions: You may deduct qualified residence interest, property taxes, and casualty losses.

Mortgage interest is considered qualified residence interest if it is incurred with respect to your principal residence and one other residence. So, you won’t be able to deduct the mortgage interest on more than one secondary residence or vacation home. There are also limits on the amount of indebtedness that may be taken into account in determining the amount of qualified residence interest that is deductible each year.

If you use your home less often for personal purposes (i.e., you don’t meet the 14 day/10 percent rule), your vacation home is considered strictly rental or business property. The tax treatment is as follows:

• Rental income: Gross rental income is taxable to the extent it exceeds the rental-related expenses.
• Rental expenses: All expenses, including mortgage interest, property taxes, insurance, advertising, and so on, can be deducted against the rental income received on the property. You should report these expenses on Schedule E of your federal income tax return.
• Losses: If the total rental expense exceeds the gross rental income, then the resulting loss may be deducted from your personal income (subject to relevant limitations, including the limitation on the deduction of passive losses).

Caution: Unlike the sale of your principal residence, you aren’t allowed a capital gain exclusion when you sell rental property or second/vacation homes. However, if you own and use the home as a principal residence for two out of the five years preceding the sale of the home, you may qualify for capital gain exclusion, even though the home was a rental property or vacation home for the balance of the five-year period.

In conclusion, we see many of our clients with second homes and short-term rentals.  If you too are exploring buying a second home, our hope is you can use this information to help you make a more informed decision.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Special Considerations for Second Homes and Vacation Homes appeared first on Austin Asset.

As Financial Advisors, below are some of the more common mortgage loan types we see clients use. 

Mortgage Loan Types

Conventional fixed-rate mortgages

As the name implies, the interest rate on a fixed-rate mortgage remains the same throughout the life of the loan. Your monthly payment (consisting of principal and interest) generally remains the same as well. The entire mortgage is repaid in equal monthly installments over the term (length) of the loan. For this reason, fixed-rate mortgages often appeal to individuals with a low tolerance for the risk associated with fluctuating monthly payments. The usual terms for fixed-rate mortgages are 15 and 30 years.

Adjustable-rate mortgages (ARMs)

With an ARM, also called a variable rate mortgage, your interest rate is adjusted periodically, rising or falling to keep pace with changes in market interest rate fluctuations. Since the term of your mortgage remains constant, the amount necessary to pay off your loan by the end of the term changes as your loan’s interest rate changes. Thus, your monthly payment amount is recalculated with each rate adjustment.

Depending on what’s specified in the mortgage contract, an ARM can be adjusted semi-annually, quarterly, or even monthly, but most are adjusted annually. The adjustments are made on the basis of a formula specified in the mortgage contract. To adjust the rate, the lender uses an index that reflects general interest rate trends, such as the one-year Treasury securities index, and adds to it a margin reflecting the lender’s profit (or markup) on the money loaned to you. Thus, if the index is 5.75 percent and the markup is 2.25 percent, the ARM interest rate would be 8 percent.

What’s to keep the interest rate from going through the roof–or, for that matter, from plunging through the floor? Most ARMs specify interest rate caps. The periodic adjustment cap may limit the amount of rate change, up or down, allowed at any single adjustment period. A lifetime cap may indicate that the interest rate may not go any higher–or lower–than a specified percentage over–or under–the initial interest rate.

The initial interest rates (referred to as teaser rates) on ARMs are generally lower than the rates on fixed-rate mortgages. An ARM may be a good option for an individual who can tolerate uncertainty in his or her mortgage interest rate and fluctuations in his or her monthly mortgage payment amount or plans to live in his or her home for only a short period of time.

Hybrid ARMs

Hybrid ARMs are mortgage loans that offer a fixed interest rate for a certain time period (3, 5, 7, or 10 years), and then convert to a 1-year ARM.

The initial fixed interest rate on a hybrid ARM is often considerably lower than the rate on either a 15-year or 30-year fixed-rate mortgage. The longer the initial fixed-rate term, however, the higher the interest rate for that term will be. Generally speaking, even the lowest of these fixed rates is higher than the initial (teaser) rate of a conventional 1-year ARM.

Hybrid ARMs are ideal for individuals who plan to stay in their homes for a short period of time (3 to 10 years) since they can take advantage of the low initial fixed interest rate without worrying about how the loan will change when it converts to an ARM. If you think your plans may change or you are planning on staying put for a while, look for a hybrid ARM with a conversion option. This option will allow you to convert your loan to a fixed-rate loan before it turns into an ARM.

Government mortgage programs

Generally, government mortgage programs offer mortgages insured and/or guaranteed by agencies of the federal government. Some of the advantages of these types of mortgages include:

• Fixed interest rates that are lower than those offered by conventional loans
• Little or no down payment required
• Less stringent qualifying guidelines than conventional loans

FHA loans

Federal Housing Administration (FHA) mortgages are similar to conventional fixed-rate mortgages, except that they are insured by the federal government. An FHA mortgage may allow a down payment of as little as 3.5 percent.  Keep in mind, however, that FHA loans require borrowers with down payments of less than 20% to pay mortgage insurance premiums.

Tip: FHA mortgage amounts are limited, and the maximum loan amount varies among geographic regions.

VA loans

The Department of Veterans Affairs (VA) mortgages are similar to conventional fixed-rate mortgages. VA mortgages are available to qualified veterans and their surviving spouses.

VA loan limits vary, depending on location. Generally, a lender will offer a VA loan equal to four times a veteran’s available entitlement (provided certain underwriting requirements are met). Currently, the basic entitlement for veterans is $36,000. You can visit http://benefits.va.gov/homeloans for more information.

Jumbo loans

For 2019 a jumbo loan (also known as a non-conforming loan) is any mortgage over $484,350, or over $726,525 in high-cost areas, for a single-family home or condominium. This figure is set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and is adjusted annually. Jumbo loans are called non-conforming loans because these organizations will not underwrite them, making them riskier to lenders. As a result, lenders often set their jumbo loan interest rates higher than conventional mortgage rates.

If you’re just over the underwriting limit for conforming loans and are having to consider a jumbo loan, you might want to either look for a less expensive house or consider increasing your down payment in order to qualify for a conforming loan with a lower interest rate. Over the life of your mortgage, a lower interest rate could create significant savings.

In closing, with several mortgage loan types to choose from the type of mortgage that is right for you will depend on many factors, such as how much you can afford, your tolerance for risk, and how long you expect to stay in your home.  The more information you have, the better.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Choosing a Mortgage | Reviewing Mortgage Loan Types appeared first on Austin Asset.

How to Evaulatuate An Early Retirement Offer

What’s the severance package?

Most early retirement offers include a severance package that is based on your annual salary and years of service at the company. For example, your employer might offer you one or two weeks’ salary (or even a month’s salary) for each year of service. Make sure that the severance package will be enough for you to make the transition to the next phase of your life. Also, make sure that you understand the payout options available to you. You may be able to take a lump-sum severance payment and then invest the money to provide income, or use it to meet large expenses. Or, you may be able to take deferred payments over several years to spread out your income tax bill on the money.

How does all of this affect your pension?

If your employer has a traditional pension plan, the retirement benefits you receive from the plan are based on your age, years of service, and annual salary. You typically must work until your company’s normal retirement age (usually 65) to receive the maximum benefits. This means that you may receive smaller benefits if you accept an offer to retire early. The difference between this reduced pension and a full pension could be large, because pension benefits typically accrue faster as you near retirement. However, your employer may provide you with larger pension benefits until you can start collecting Social Security at age 62. Or, your employer might boost your pension benefits by adding years to your age, length of service, or both. These types of pension sweeteners are key features to look for in your employer’s offer — especially if a reduced pension won’t give you enough income.

Does the offer include health insurance?

Does your employer’s early retirement offer include medical coverage for you and your family? If not, look at your other health insurance options, such as COBRA, a private policy,  dependent coverage through your spouse’s employer-sponsored plan, or an individual health insurance policy through either a state-based or federal health insurance Exchange Marketplace. Because your health-care costs will probably increase as you age, an offer with no medical coverage may not be worth taking if these other options are unavailable or too expensive. Even if the offer does include medical coverage, make sure that you understand and evaluate the coverage. Will you be covered for life, or at least until you’re eligible for Medicare? Is the coverage adequate and affordable (some employers may cut benefits or raise premiums for early retirees)? If your employer’s coverage doesn’t meet your health insurance needs, you may be able to fill the gaps with other insurance.

What other benefits are available?

Some early retirement offers include employer-sponsored life insurance. This can help you meet your life insurance needs, and the coverage probably won’t cost you much (if anything). However, continued employer coverage is usually limited (e.g., one year’s coverage equal to your annual salary) or may not be offered at all. This may not be a problem if you already have enough life insurance elsewhere, or if you’re financially secure and don’t need life insurance. Otherwise, weigh your needs against the cost of buying an individual policy. You may also be able to convert some of your old employer coverage to an individual policy, though your premium will be higher than when you were employed.

In addition, a good early retirement offer may include other perks. Your employer may provide you and other early retirees with financial planning assistance. This can come in handy if you feel overwhelmed by all of the financial issues that early retirement brings. Your employer may also offer job placement assistance to help you find other employment. If you have company stock options, your employer may give you more time to exercise them. Other benefits, such as educational assistance, may also be available. Check with your employer to find out exactly what its offer includes.

Can you afford to retire early?

To decide if you should accept an early retirement offer, you can’t just look at the offer itself. You have to consider your total financial picture. Can you afford to retire early? Even if you can, will you still be able to reach all of your retirement goals? These are tough questions that a financial professional should help you sort out, but you can take some basic steps yourself.

Identify your sources of retirement income and the yearly amount you can expect from each source. Then, estimate your annual retirement expenses (don’t forget taxes and inflation) and make sure your income will be more than enough to meet them. You may find that you can accept your employer’s offer and probably still have the retirement lifestyle you want. But remember, these are only estimates. Build in a comfortable cushion in case your expenses increase, your income drops, or you live longer than expected.

If you don’t think you can afford early retirement, it may be better not to accept your employer’s offer. The longer you stay in the workforce, the shorter your retirement will be and the less money you’ll need to fund it. Working longer may also allow you to build larger savings in your IRAs, retirement plans, and investments. However, if you really want to retire early, making some smart choices may help you overcome the obstacles. Try to lower or eliminate some of your retirement expenses. Consider a more aggressive approach to investing. Take a part-time job for extra income. Finally, think about electing early Social Security benefits at age 62, but remember that your monthly benefit will be smaller if you do this.

What if you can’t afford to retire? Finding a new job

You may find yourself having to accept an early retirement offer, even though you can’t afford to retire. One way to make up for the difference between what you receive from your early retirement package and your old paycheck is to find a new job, but that doesn’t mean that you have to abandon your former line of work for a new career. You can start by finding out if your former employer would hire you as a consultant. Or, you may find that you would like to turn what was once just a hobby into a second career. Then there is always the possibility of finding full-time or part-time employment with a new company.

However, for the employee who has 20 years of service with the same company, the prospect of job hunting may be terrifying. If you have been out of the job market for a long time, you might not feel comfortable or have experience marketing yourself for a new job. Some companies provide career counseling to assist employees in re-entering the workforce. If your company does not provide you with this service, you may want to look into corporate outplacement firms and nonprofit organizations in your area that deal with career transition.

Note: Many early retirement offers contain non-competition agreements or offer monetary inducements on the condition that you agree not to work for a competitor. However, you’ll generally be able to work for a new employer and still receive your pension and other retirement plan benefits.

What will happen if you say no?

If you refuse early retirement, you may continue to thrive with your employer. You could earn promotions and salary raises that boost your pension. You could receive a second early retirement offer that’s better than the first one. But, you may not be so lucky.  Consider whether your position could be eliminated down the road.

If the consequences of saying no are hard to predict, use your best judgment and seek professional advice. But don’t take too long. You may have only a short window of time, typically 60 to 90 days, to make your decision.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Evaluating an Early Retirement Offer appeared first on Austin Asset.

How Social Security Works

The Social Security system is based on a simple premise: Throughout your career, you pay a portion of your earnings into a trust fund by paying Social Security or self-employment taxes. Your employer, if any, contributes an equal amount. In return, you receive certain benefits that can provide income to you when you need it most–at retirement or when you become disabled, for instance. Your family members can receive benefits based on your earnings record, too. The amount of benefits that you and your family members receive depends on several factors, including your average lifetime earnings, your date of birth, and the type of benefit that you’re applying for.

Your earnings and the taxes you pay are reported to the Social Security Administration (SSA) by your employer, or if you are self-employed, by the Internal Revenue Service. The SSA uses your Social Security number to track your earnings and your benefits.

You can find out more about future Social Security benefits by signing up for a my Social Security account at the Social Security website, ssa.gov, so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor, and disability benefits. If you’re not registered for an online account and are not yet receiving benefits, you’ll receive a statement in the mail every year, starting at age 60.   You can also use the Retirement Estimator calculator on the Social Security website, as well as other benefit calculators that can help you estimate disability and survivor benefits.

Social Security eligibility

A key component to understanding how Social Security Works is eligibility. When you work and pay Social Security taxes, you earn credits that enable you to qualify for Social Security benefits. You can earn up to 4 credits per year, depending on the amount of income that you have. Most people must build up 40 credits (10 years of work) to be eligible for Social Security retirement benefits, but need fewer credits to be eligible for disability benefits or for their family members to be eligible for survivor benefits.

Your retirement benefits

Your Social Security retirement benefit is based on your average earnings over your working career. Your age at the time you start receiving Social Security retirement benefits also affects your benefit amount. If you were born between 1943 and 1954, your full retirement age is 66. Full retirement age increases in two-month increments thereafter, until it reaches age 67 for anyone born in 1960 or later.

But you don’t have to wait until full retirement age to begin receiving benefits. No matter what your full retirement age, you can begin receiving early retirement benefits at age 62. Doing so is sometimes advantageous: Although you’ll receive a reduced benefit if you retire early, you’ll receive benefits for a longer period than someone who retires at full retirement age.

You can also choose to delay receiving retirement benefits past full retirement age. If you delay retirement, the Social Security benefit that you eventually receive will be as much as 8 percent higher. That’s because you’ll receive a delayed retirement credit for each month that you delay receiving retirement benefits, up to age 70. The amount of this credit varies, depending on your year of birth.

Disability benefits

If you become disabled, you may be eligible for Social Security disability benefits. The SSA defines disability as a physical or mental condition severe enough to prevent a person from performing substantial work of any kind for at least a year. This is a strict definition of disability, so if you’re only temporarily disabled, don’t expect to receive Social Security disability benefits–benefits won’t begin until the sixth full month after the onset of your disability. And because processing your claim may take some time, apply for disability benefits as soon as you realize that your disability will be long term.

Family benefits

If you begin receiving retirement or disability benefits, your family members might also be eligible to receive benefits based on your earnings record. Eligible family members may include:

• Your spouse age 62 or older, if married at least 1 year
• Your former spouse age 62 or older, if you were married at least 10 years
• Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled
• Your children under age 18, if unmarried
• Your children under age 19, if full-time students (through grade 12) or disabled
• Your children older than 18, if severely disabled

Each family member may receive a benefit that is as much as 50 percent of your benefit. However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member’s benefit will be reduced proportionately. Your benefit won’t be affected.

Survivor benefits

Another key concept to understand about how Social Security works is survivor benefits. When you die, your family members may qualify for survivor benefits based on your earnings record. These family members include:

• Your widow(er) or ex-spouse age 60 or older (or age 50 or older if disabled)
• Your widow(er) or ex-spouse at any age, if caring for your child who is under 16 or disabled
• Your children under 18, if unmarried
• Your children under age 19, if full-time students (through grade 12) or disabled
• Your children older than 18, if severely disabled
• Your parents, if they depended on you for at least half of their support

Your widow(er) or children may also receive a one-time $255 death benefit immediately after you die.

Applying for Social Security benefits

The SSA recommends apply for benefits online at the SSA website, but you can also apply by calling (800) 772-1213 or by making an appointment at your local SSA office. The SSA suggests that you apply for benefits three months before you want your benefits to start.  If you’re applying for disability or survivor benefits, apply as soon as you are eligible.

Depending on the type of Social Security benefits that you are applying for, you will be asked to furnish certain records, such as a birth certificate, W-2 forms, and verification of your Social Security number and citizenship. The documents must be original or certified copies. If any of your family members are applying for benefits, they will be expected to submit similar documentation. The SSA representative will let you know which documents you need and help you get any documents you don’t already have.

At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.

The post Understanding Social Security – How Social Security Works appeared first on Austin Asset.

Earlier today, Austin Public Health announced a move to Stage 5 of their risk-based guidelines in response to the surge. Local medical professionals, many of whom are clients, continue to put themselves in harms way to serve the needs of the community and as such we feel compelled to do our part to lessen the strain on the healthcare system.

Effective immediately, our office will be limited to our staff alone and we will once again rely on virtual meetings for client interactions. It is our hope this most recent spike will be the last of its kind and limited in duration.

We want to thank you for your flexibility and understanding throughout this most bizarre season and assure you we will do everything in our power to continue to deliver the same service you have come to expect from us.

Austin Asset Executive Team

The post A Note to Our Clients Regarding COVID-19 appeared first on Austin Asset.