Mint Money Audit: Managing Money When You Make Enough

Anna’s email requesting help with her finances began with a unique confession.

“Farnoosh, my money problem garners little sympathy,” the 32-year-old wrote. “My issue is that I make too much of it.”

Now, THIS is interesting, I thought. I immediately followed up with many questions.

Here’s what I learned through our conversation:

The Denver-based Mint user earns $220,000 per year as an engineer. Anna’s also benefited from years of big bonuses and her net worth, not including her home equity, is close to a million dollars.

After paying taxes and health benefits and maxing out her 401(k), Anna takes home between $8,000 and $10,000 each month. Her expenses mainly consist of a $1,200 mortgage payment, car insurance, gas, food and utilities, amounting to maybe a few thousand dollars per month.

The rest either goes into savings where she stashes about $5,000 to $10,000 for unexpected expenses or into a brokerage account where she has roughly $800,000 invested. A wealth management firm manages that portfolio and charges, she says, an annual 1% fee.

Anna has no consumer debt, besides her mortgage, which amounts to about $338,000. It’s a 30-year fixed rate loan with a 2.85% interest rate. The home has appreciated in recent years with about $100,000 in equity (including Anna’s initial 20% down payment).

So, what is the problem, exactly?

“My big worry is that I don’t have the habits to manage money well,” Anna told me. Her sizeable bank balance has her feeling financially free, although she worries about getting carried away with spending sometimes.

“When I see money in my bank account I rationalize that ‘yea, that vacation is doable. I don’t hold back on the things that may seem frivolous,’” she says. But It seems she wants more financial grounding and to be able to evaluate expenditures and price tags more critically.

Anna’s situation may be unique, but I think relatable in the sense that we all would like to feel more thoughtful with how we spend, save and invest. And while some may do well with earning money, it should not be assumed that they can also manage that money well.

I applaud Anna for wanting to be sure that, even with an impressive net worth, she is actually making wise financial decisions.

Here’s my advice.

Take a Deep Breath

No need to panic when spending on things and experiences that you enjoy. From what I can tell Anna’s prioritizing the serious financial stuff first like contributing the max to her 401(k) and saving all of her annual bonuses in a brokerage account. She has no credit card debt and pays all her bills on time. That’s terrific.

Sometimes we just want to hear that we’re on the right track with our money and I have a very simple way to measure this:

If you manage each paycheck by saving, investing and paying all your bills first, then by all means, you’re entitled to have fun with whatever is left without any fear or regret. Am I right?

If you’ve done the good work of taking care of your future with your money, then don’t hesitate treating yourself and others with the remaining funds today. Splurge away and enjoy your hard-earned money. And remember to enjoy the moment.

Ditch Your Money Managers

I do think Anna could find a better home for her investments.

Paying one percent of her managed assets to this firm may not seem that high of an annual fee. But when you think about Anna’s balance of $800,000, that’s $8,000 this year. What about next year and the decades after that as she contributes more to the account? That fee, compounded over the next 30 years, will amount to – conservatively – over one million dollars. Ouch.

That doesn’t even factor in the expense ratios for each mutual fund that’s in her portfolio.

If all Anna seeks is investment assistance, she may be better suited stationing her money with an automated wealth platform or robo-advisor where her money is largely invested in low-fee index funds or exchange-traded funds (ETF) and the portfolio management fee is typically 0.50% or less.

Of course, breaking up with your financial advisor is not always so simple. It’s especially hard for Anna, as she equated her money managers to “father figures.”

If I were Anna, I would just explain to my advisors over email something like, “I want be more conservative with my money and that includes being extra mindful of the various fees that I’m paying. To that end, I’ve decided to manage my money more independently. I’m sure you can understand. I appreciate your help over the years. Please let me know next steps.”

Planners know the drill and are used to having clients end relationships.  Stay strong. Nobody can really argue with the fact that saving money is a good thing!

Establish Short and Long Term Goals

Anna wants to spend and save with more conviction. I think having some concrete, tangible goals can help.

For example, she shared that she’d like to get married, have a family and own two homes – one near her office downtown and another in the mountains as a getaway.

So, the next step is to understand what these goals cost. What are, say, the going prices on a vacation home in her state? How much might she want to stash in a separate account for the future down payment on this property? Knowing the underlying costs of her goals can better direct how much to spend elsewhere.

Next time she’s planning a vacation, she may be more inclined to price compare or hunt down better deals, as opposed to just judge whether the trip is financially “doable” by the amount of money in her bank account. Now she’ll have the image of that second home and its costs and will make a more informed choice.

Contribute to a Cause

Last but not least, when you feel you make more than enough, like Anna does, this is a great opportunity to be extra charitable. If she’s seeking a way to give her money more meaning and feel purposeful in her financial life, this is a truly wonderful way to go about it. Discover a cause that you’re passionate about and make an impact as a volunteer and donor.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

The post Mint Money Audit: Managing Money When You Make Enough appeared first on MintLife Blog.

Source: mint.intuit.com

A Guide to Qualified Retirement Plans

woman on computer with notebook

Saving for retirement is an important financial goal and there are different options when it comes to where to invest. A qualified retirement plan can make it easier to build wealth for the long term, while enjoying some significant tax benefits.

Qualified retirement plans must meet Internal Revenue Code standards for form and operation under Section 401(a). If you have a retirement plan at work, it’s most likely qualified. But not every retirement account falls under this umbrella and those that don’t are deemed “non-qualified.”

So just what is a qualified retirement plan and how is it different from a non-qualified retirement plan?
Understanding the nuances of these terms can help you better shape your retirement plan for growing wealth.

What Is a Qualified Retirement Plan?

Qualified retirement plans allow you to save money for retirement from your income on a tax-deferred basis. These plans are managed according to Employment Retirement Income Security Act (ERISA) standards.

The IRS has specific rules for what constitutes a qualified retirement plan and what doesn’t. Public employers can set up a qualified retirement plan as long as these conditions are met:

•  Employer contributions are deferred from income tax until they’re distributed and are exempt from social security and Medicare tax
•  Employer contributions are subject to FICA tax
•  Employee contributions are subject to both income and FICA tax

Following those guidelines, qualified retirement plans can include:

•  Defined benefit plans (such as traditional pension plans)
•  Defined contribution plans (such as 401(k) plans)
•  Employee stock ownership plans (ESOP)
•  Keogh plans

Section 403(b) plans, which you might have access to if you’re a public school or tax-exempt organization employee, mimic some of the characteristics of qualified retirement plans. But because of the way employer contributions to these plans are taxed the IRS doesn’t count them as qualified plans. The same is true for section 457(b) plans, which are available to public employees.

Defined Benefit vs. Defined Contribution Plans

When talking about qualified retirement plans and how to use them to invest for the future, it’s important to understand the distinction between defined benefit and defined contribution plans.

ERISA recognizes both types of plans, though they work very differently. A defined benefit plan pays out a specific benefit at retirement. This can either be a set dollar amount or payments based on a percentage of what you earned during your working career.

This type of defined benefit plan is most commonly known as a pension. If you have a pension from a current (or former) employer, you may be able to receive monthly payments from it once you retire, or withdraw the benefits you’ve accumulated in one lump sum. Pension plans can be protected by federal insurance coverage through the Pension Benefit Guaranty Corporation (PBGC).

Defined contribution plans, on the other hand, pay out benefits based on how much you (and your employer, if you’re eligible for a company match) contribute to the plan during your working years. The amount of money you can defer from your salary depends on the plan itself, as does the percentage of those contributions your employer will match.

Defined contribution plans include 401(k) plans, 403(b) plans, ESOPs and profit-sharing plans. With 401(k)s, that includes options like SIMPLE and solo 401(k) plans. But it’s important to note that while these are all defined contribution plans, they’re not all qualified retirement plans. Of those examples, 403(b) plans wouldn’t enjoy qualified retirement plan tax benefits.

What Is a Non-Qualified Retirement Plan?

Non-qualified retirement plans are retirement plans that aren’t governed by ERISA rules or IRC Section 401(a) standards. These are plans that you can use to invest for retirement outside of your workplace.

Examples of non-qualified retirement plans include:

•  Traditional IRAs
•  Roth IRAs
•  403(b) plans
•  457 plans
•  Deferred compensation plans
•  Self-directed IRAs
•  Executive bonus plans

While these plans can still offer tax benefits, they don’t meet the guidelines to be considered qualified. But they can be useful in saving for retirement, in addition to a qualified plan.

Traditional and Roth Individual Retirement Accounts

Traditional and Roth IRAs allow you to invest for retirement, with annual contribution limits. For 2020 and 2021, the maximum amount you can contribute to either IRA is $6,000, or $7,000 if you’re over 50.

Traditional IRAs allow for tax-deductible contributions. These accounts are funded using pre-tax dollars. When you make qualified withdrawals in retirement, they’re taxed at your ordinary income tax rate. IRAs do have required minimum distributions (RMD) starting at age 72.

Roth IRAs don’t offer the benefit of a tax deduction on contributions. But they do allow you to withdraw money tax-free in retirement. Unlike traditional IRAs, Roth IRAs do not have RMDs, meaning you don’t have to withdraw money until you want to.

A self-directed IRA is another type of IRA you might consider if you want to invest in stock or mutual fund alternatives, such as real estate. These IRAs require you to follow specific rules for how the money is used to invest, and engaging in any prohibited transactions could result in the loss of IRA tax benefits.

Advantages of Qualified Retirement Plans

Qualified retirement plans can benefit both employers and employees who are interested in saving for retirement.
On the employer side, the benefits include:

•  Being able to claim a tax deduction for matching contributions made on behalf of employees
•  Tax credits and other tax incentives for starting and maintaining a qualified retirement plan
•  Tax-free growth of assets in the plan

Additionally, offering a qualified retirement plan, such as a 401(k), can also be a useful tool for attracting and retaining talent. Employees may be more motivated to accept a position and stay with the company if their benefits package includes a generous 401(k) match.

Employees also enjoy some important benefits by saving money in a qualified plan. Specifically, those benefits include:

•  Tax-deferred growth of contributions
•  Ability to build a diversified portfolio
•  Automatic contributions through payroll deductions
•  Contributions made from taxable income each year
•  Matching contributions from your employer (aka “free money”)
•  ERISA protections against creditor lawsuits

Qualified retirement plans can also feature higher contribution limits than non-qualified plans, such as an IRA. If you have a 401(k), for example, you can contribute up to $19,500 for the 2020 and 2021 tax years, with an additional catch-up contribution of $6,500 for individuals 50 and older.

If you’re able to max out your annual contribution each year, that could allow you to save a substantial amount of money on a tax-deferred basis for retirement. Depending on your income and filing status, you may also be able to make additional contributions to a traditional or Roth IRA.

Making Other Investments Besides a Qualified or Non-Qualified Retirement Plan

Saving money in a qualified retirement plan or a non-qualified retirement plan doesn’t prevent you from investing money in a taxable account. With a brokerage account, you can continue to build your portfolio with no annual contribution limits. The trade-off is that selling assets in your brokerage account could trigger capital gains tax at the time of the sale, whereas qualified accounts allow you to defer paying income tax until retirement.

But an online brokerage account could help with increasing diversification in your portfolio. Qualified plans offered through an employer may limit you to mutual funds, index funds, or target-date funds as investment options. With a brokerage account, on the other hand, you may be able to trade individual stocks or fractional shares, exchange-traded funds, futures, options, or even cryptocurrency. Increasing diversification can help you better manage investment risk during periods of market volatility.

The Takeaway

While a qualified retirement plan allows investors to put away pre-tax money for retirement, a non-qualified plan doesn’t offer tax-deferred benefits. But both can be important parts of a retirement saving strategy.

Regardless of whether you use a qualified retirement plan or a non-qualified plan to grow wealth, the most important thing is getting started. Your workplace plan might be an obvious choice, but if your employer doesn’t offer a qualified plan, you do have other options.

Opening a traditional or Roth IRA online with SoFi Invest®, for example, can help you get a jump on retirement saving. Members can choose from a wide range of investment options or take advantage of a custom-build portfolio to invest.

Find out how an online IRA with SoFi might fit in to your financial plan.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOIN20257

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Source: sofi.com

3 Reasons to Set Up a Donor-Advised Fund to Maximize Your Charitable Tax Deductions

Using donor-advised funds is a more advanced tax strategy that has gotten more popular recently with the introduction of the Tax Cuts and Jobs Act (TCJA) in February 2020. The TCJA nearly doubled the amount of the standard deduction, which makes it less advantageous to itemize deductions such as charitable contributions. For people with a lot of charitable contributions, donor-advised funds are one option to still get a deduction for charitable contributions.

What is a donor-advised fund?

A donor-advised fund (DAF) is a registered 501(c)(3) charitable organization that accepts contributions and generally funds other charitable organizations. While the concept of a donor-advised fund has been around for nearly 100 years, they were typically only used by the ua-wealthy. And while it is true that donor-advised funds are still not going to be useful for the vast majority of people, recent tax law changes have made their use more prevalent.

You can set up a donor-advised fund with most brokerages, including Fidelity, Vanguard, and Bank of America. You can donate cash, securities, or other types of assets to the DAF. The exact list of assets eligible for donation depends on the brokerage. After you have contributed, you can then make charitable contributions from the balance of your account.

You can maximize your charitable tax deductions in one year

One common reason that people set up donor-advised funds is to maximize their charitable tax deductions in a particular tax year. To show why this can be beneficial, I’ll use an example:

Our example family files their taxes married filing jointly and has regular charitable contributions of $20,000 per year. The standard deduction in 2020 for married filing jointly is $24,800. Because their amount of charitable deductions is less than the standard deduction, they may not see any tax benefit from their charitable contributions (depending on their amount of other itemized deductions). In 2021 they again plan to contribute $20,000 to charitable organizations and again are unlikely to see any tax benefit from doing so.

Now consider this same family now decides to set up a donor-advised fund in 2020. They have extra money sitting around in low-interest savings or checking account or in a taxable investment account. So they set up a donor-advised fund in 2020 and fund it with $40,000 in cash, stocks, or other assets. They are eligible to take the full $40,000 as an itemized deduction, even if they only use $20,000 to donate to the charity of their choice. Then in 2021, they can donate the remaining $20,000 to their preferred charity. They will not be able to deduct any charitable contributions in 2021 but can instead take the raised standard deduction amount.

You may be able to deduct the full value of stocks or other investments

Another reason you might want to set up a donor-advised fund is that you may be able to deduct the full value of stocks or other investments. Again, I’ll use an example to help illustrate the point.

Let’s say that you have shares that you purchased for $20,000 that are now worth $50,000. Many charities, especially smaller organizations, are not set up to accept donations of stocks or other investments. So if you want to donate that $50,000 to charity, you may have to liquidate your shares. This will mean that you will have to pay tax on the proceeds.

With a donor-advised fund, you can donate the shares to your fund and deduct the full fair market value of your shares. Then the fund can make the contribution to the charity of your choice.

Donate a wide range of assets

Another benefit to setting up a donor-advised fund is the ability to donate a wide range of different classes of assets. As we mentioned earlier, many charities are not set up in such a way to be able to accept non-cash donations. While the exact list of assets that a donor-advised fund can accept varies by the firm running the fund, it generally will include more types of assets than a typical charity.

Why you might not want to set up a donor-advised fund

While there are plenty of advantages to setting up a donor-advised fund, there are a few things that you might want to watch out for.

  • It’s definitely more complicated than just making charitable contributions on your own. You may find that the tax savings are not worth the extra hassle.
  • On top of the added layer of complexity, most firms with DAFs charge administrative fees that can cut into your rate of return.
  • You may be limited on the charities that you can donate to. Each donor-advised fund typically will have a list of eligible charities. So you may find that a charity that you want to donate to is not available.
  • You also lose control over the funds that you donate – the donation to the fund is irrevocable, meaning once you’ve donated to the fund you cannot get the donation back. While most advisors state that they will donate the money as you direct, they are not legally required to do so.
  • The money in a DAF is invested, so it may lose value. That means that the amount you were hoping to donate may be less than you were anticipating. You also typically have a limited range of investments available for your investment, and those funds also often come with fees.

It’s also important to keep in mind, the annual income tax deduction limits for gifts to donor-advised funds, are 60% of Adjusted Gross Income for contributions of cash, 30% of AGI for contributions of property that would qualify for capital gains tax treatment; 50% of AGI for blended contributions of cash and non-cash assets.

The post 3 Reasons to Set Up a Donor-Advised Fund to Maximize Your Charitable Tax Deductions appeared first on MintLife Blog.

Source: mint.intuit.com

Alternative Investments Are Not Just for the Wealthy

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6 Best Stock Tracking Apps – The Smart Way To Monitor Your Investments

Want to track stocks? Find out which apps are the most helpful, and get started in the stock market world today.Want to track stocks? Find out which apps are the most helpful, and get started in the stock market world today.

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