Money Pilot Financial Advisor Podcast

In Episode 39 Stash the Cash we talked about different cash accounts you can use for short term savings goals, like savings accounts, CDs, and money market accounts. Today, we’ll ask What Account Should I Consider If I Want To Save More. I put a free, handy checklist that you can download from my website at www.moneypilotadvisor.com.

Healthcare savings plans offered by employers. These aren't available to our military service members insured with TRICARE. These special savings accounts allow you to put pre-tax dollars in them directly from your pay check. And as long as you use the funds to pay eligible medical expenses, you won’t pay tax on the money when you draw it out either. With the Flexible Savings Account (FSA) you and your employer can make contributions. But remember to spend the money in your FSA each year because you can't carry it over.

Health Savings Account (HSA) You can only use one if you have a high deductible health plan. Again, not available with TRICARE. Many civilian employers and FEHB do offer them. It is like an FSA but you can carry over your balance from year to year. If you still have money in your HSA at age 65, you can withdraw it for any reason tax free. It's the Triple Crown of tax free. Consider keeping at least that max out-of-pocket amount in your HSA and/or emergency savings to cover you if you have a big expense.

Retirement savings accounts like a 401(k), 403(b), or the Thrift Savings Plan (TSP). Contribute enough to max out any match offered by your employer. For FERS employees and BRS military service members that's at least 5% of your pay. CSRS feds and non-BRS military don’t get a match. Everyone else check with your employer.

Everyone with earned income contribute to an Individual Retirement Account (IRA) and if you’re a couple with only one income, you can still save up to the max for each of you. This is a great way for a non-working spouse to build up retirement savings. There are regular r and ROTH IRAs. There’s a lot to it. Learn more in my Podcast Episodes 28, 29, and 30 .

529 College Savings Plans. 529s are offered by almost every state. Withdrawals are tax-free if used for qualified education expenses. And you can change always the beneficiary if needed. Many states also offer other incentives that sweeten the 529 pot so it's worth checking out the details for your state.

Tax Deferred Insurance either an annuity ora cash value life insurance policy, like whole life or universal life Insurance. I feel like both of these though should come with a warning label. They're not necessarily bad saving vehicles. But they often offer large commissions to the agent that sells them and all too often our sold to people when they are not appropriate. So if you're considering an annuity or cash value life insurance, this would be a great time to get a second professional opinion from a financial planner to see if other savings vehicles and or cheaper term life insurance may better fit your particular needs.

Lastly, consider a taxable brokerage account. Generally, you can take your money and use it when and where you want without a penalty. These accounts are good if you are willing to take some risk, plan to leave the money there for at least a year, and want would like to earn more return than cash accounts. Setting up these accounts doesn't have to be intimidating. You can usually set up an account online with a low fee mutual fund company like Vanguard, or Betterment which helps you invest in low cost ETFs. Even bigger name brokerage houses like Charles Schwab have some simple, low fee options. If you want someone else to handle it all for you or advice on what to invest in, this is another good time to call on a fee-only financial planner or advisor.

Hi everyone and welcome to tax season. A few days ago, the Internal Revenue Service announced that the federal income tax filing due date for individual 2020 returns and payment of income tax has been automatically extended from April 15 to May 17, 2021.

You get an extra month to file and pay your federal income tax. They are now both due on May 15. But this does NOT mean that your State income tax filing deadline is automatically extended (if you’re state has an income tax). Some states already have deadlines later than May 17, and MAY not be affected. The rest of the states are deciding what to do and have been making announcements. California, Virginia, North and South Carolina, are among the states that have already extended their deadlines to May 17th and more are making the decision. Check with your state for the latest specifics. The states I mentioned have also said the deadline to pay the state income tax was also extended, but don’t assume that is true for all states. Double check.

In another late minute change, if you received unemployment income in 2020 and your AGI was below $150,000 , you won’t pay federal income tax on the first $10,200 of unemployment you received. If this affects you, but you have already filed your 2020 tax return, do not file an amended return just for that. The IRS put out guidance that they will re-figure your taxes using the excluded unemployment amount and adjust your account accordingly. The IRS will send any refund amount directly to you.

If this affects you, you haven’t filed yet, and you live in a state with a state income tax, may want to wait a few days or a week. Tax preparation software is rapidly catching up with the states’ changes as they are announced. But we noticed an anomaly on Saturday in the in software we use where the fix for the federal returns, inadvertently caused an error in the calculation of the state return. If you are doing your own tax prep, give the software a bit of time to make the changes and be sure to update it the software before you send in your electronic return. If you use a tax preparer they should be on top of this already.

Should you wait until May 17 to file? if you don’t have a compelling reason to put it off and you are expecting a refund filing sooner will mean you get your refund faster.

Even with the extensions to file your federal tax return, will you be unable to pay your taxes on time? FILE anyway. Remember the penalty for failure to PAY your taxes is 0.5% per month plus interest. The penalty for failure to FILE by the extended deadline is 5% per month. Yes the penalty for not filing on time is 10 times more than the penalty for not paying your on time.

Do you have special circumstances and you can’t file on time? No problem, before the new May 15 deadline, file for an extension with IRS FORM 4868. Individual taxpayers can request a penalty free-extension before the filing deadline and then actually file your return by October 15. But understand the deadline to pay your taxes will not be extended past the May 17. And again if your state has an income tax, check with your state for any special rules or extensions.

One special note, especially for our listeners who pay quarterly estimated taxes. Your 2021 estimated tax payments did NOT get an extension. If you're required to make estimated quarterly tax payments to the IRS because you are self-employed, have rental property, or have investment income or other reasons, you still need to make those payments at the normal times which is still April 15 for 1st quarter 2021 and June 15 for the second quarter payments. This is different than last year when they were extended. So remember get those estimated 1st quarter payments in by 15 April as normal.

Hope this has cleared the air a bit and we’ll speak with you next time.

This week, we're going to talk about how to bridge the gap if you've decided you want to try something you've always dreamed about, find a different career, or just take a much needed break. When planning for this, think what do you want this gap to be and for how long. Then come up with a budget for that gap. Your current budget is a good place to start, then make adjustments.

Another key budget consideration is health insurance. This is NOT the place to skimp. It's not worth putting your whole financial future at risk by skipping health care insurance. This can be a bit of a challenge, but there are options. For example, if you're in the military you're when you transition out, you’re eligible for the Continued Health Care Benefit Program,but it is quite expensive. Anyone, can shop for health insurance on healthcare.gov. There's different plans you can choose from and you may qualify for a tax credit to pay for some of the premium costs.. You will need to know where you plan to home base, because these plans vary by state. If you're healthy you may save money selecting a high deductible health plan. Your premiums would be lower in exchange for paying more out of pocket expenses and having a higher catastrophic cap

Next consider life insurance. If you have someone you support financially who would struggle without your income when you pass, like children and or a spouse that has been out of the workforce awhile, or is earning a lower income, you need to plan for continuing life insurance during your gap. If you are meeting that need now with workplace group life insurance like SGLI or FEGLI, you will need to buy life insurance before you start your gap. Term life insurance policies are usually quite reasonably priced.

Once you've developed a budget for your gap t, look at how much time you have until your gap starts, and put a dollar figure on much you need to save from each paycheck to get there.

The last big decision is what to do with those savings until you need them. If you're one to three years out from your gap, the best thing to do is save that money in an FDIC insured bank account. That can be a savings account, a money market account at a bank, or certificates of deposit.

If your gap is more than three years away depending on your tolerance for risk and whether you've got flexibility in the timing of your gap, you may earn a higher return. But that means taking some risk. Bonds are often a good choice for these sort of mid-term goals. Your returns will fluctuate, but not as much as stocks. Stock are riskier, but on average provide even higher returns. It's helpful to have some flexibility in timing your gap. If for instance, you're able to just put it off a year, you can continue saving, and that gives time for the markets to rebound a bit. And then you could get that back in line and probably even exceed your initial goal. If you can wait.

A good vehicle for doing this saving into low cost index funds. You can buy these funds directly from a mutual fund company or open a brokerage account Another option is Betterment. They invest your savings in low cost index funds that track an entire stock and bond market, just tell them what percentage to invest in stocks and what percentage to invest in bonds. Vanguard has Life Strategy Family Funds look at how much time you have until you need your savings, then invest in mutual funds for you.

I hope you’ve enjoyed my podcasts on funding a gap. I’d love to hear about your dreams for a transition or gap and how you will save for it. If you’d like some help with the planning reach out for a free consultation. I love helping you live your dream life.

Profits on investments can be taxed as regular income or at a lower long-term capital gains tax rate. Capital assets are things you buy, hold, and then sell, like stocks, bonds, mutual funds, Exchange Traded Funds (ETF), collectibles, and real estate property. Its increase in value is called gain. Capital gains are taxed when they are sold. You calculate gain by subtracting what you paid, called basis, from what you sell it for. To be long term you have to hold it for one year or more. If you buy a capital asset l, hold it for one year or more, then sell it for more than you paid for it, you have a long-term capital gain. You will owe tax on it, but the tax rate you pay will be lower than regular income tax.

Long term capital gains (LTCG) are taxed at 0%, 15%, and 20%. In 2020, if your total income was up to $40,000 if you’re single, or $80,000 MFJ your LTCG are taxed at 0%! Over that up to $400,000 plus you’re LTCG will be taxed at 15%. If you are expecting a drop in income that would put you in the 0% LTCG tax bracket, like taking some time off from work after transitioning out of the military, retiring early before you are eligible for a pension or social security, or are between jobs, this may be a good time to realize a LTCG. If you sell while you are in the 0% LTCG bracket, you pay no tax on it. You can reinvest it in something else and reset your basis, paying less tax overall than if you let that initial investment ride. Even if you won’t be in the 0% LTCG bracket, the LTCG rate is always lower than your federal income tax bracket, with a couple of exceptions that I’ll cover below.

Here are a few things that are NOT long-term capital gains. Regular dividends and interest from investments you own are taxed as regular income. If you sell an asset you held for less than one year, it is a short-term capital gain and will be also taxed at your higher regular income rate.

If you sell an asset for less than you paid for it, it is a capital loss. You can subtract your losses from your gains in the same year to determine your tax. If you have an overall gain, you pay tax on the difference. If you have an overall loss of, you can deduct up to $3,000 of it from your regular taxable income. The rest of your losses have to be “carried over” to the next year.

A special category is the sale of a your home. Up to $250,000 of gain if you are single, $500,000 of gain if married is not taxed if you lived in your home for 2 of the last 5 years before you sold it. Our military can have up to 10 years to meet the requirement if you PCS . And federal employees suspend the 5-year clock while they on government orders overseas . .

There’s not enough time today to go into the sale of a rental property which is also subject to LTCG tax. But know that improvements to the property are added to basis. And when sold you will pay a special 25% capital gains tax on all the depreciation deducted from your taxes over the years, called unrecaptured depreciation.

The last special rule is the LTCG rate for some assets are taxed at a flat 28% , no matter your income . This includes collectibles like art, stamps, coins, cards, comics, other rare items, and antiques, as well as precious metals in any form. If you are a high earner in the 32%, 35%, 37% income tax brackets, the LTCG tax rate of “just” 28% is still a good deal. But for most Americans, the 28% LTCG rate for this special category of assets is HIGHER than your regular income tax rate.

Lastly, keep detailed records of how much you pay for your assets. If you are buying and selling assets with a broker-dealer, bank, or mutual fund they will issue you a FORM 1099-B each year that will list the sales details and basis and you just plug that into your tax return

IRS Topic No. 409 Capital Gains and Losses https://www.irs.gov/taxtopics/tc409

Today, I thought we'd talk about that B word. You know what I mean. The budget. I don't even like that word, it just brings back memories of somebody telling me what to do with my money. And let's face it, we work hard for our money, we don't want somebody else telling us what to do. It's my life, it's my money, right? Same for you.
The first thing I usually do with clients when we're talking about the B word is really getting a good feel for what your values are. I give them a sheet of values circle the different ones, you might just think of it off the top of your head. But I encourage you to just sit down and just take a little bit of time. Things that might be on your list could be community, contentment, creativity, humanitarianism, hard work, originality, relationships, or one of may others.
So once we've got your values in life, it's then time to really nail down the values of your budget. That is the numbers, how much money's coming in, and how much money's going out, and where it's all going. A great way to do this is with objects that represent a certain amount of dollars. I use 2 different color blocks. You could use peanuts and almonds if you want.
First write each of your monthly expense categories on a card and fold it in half so it will stand up like a tent. Assign a dollar value to each green block, peanut, or whatever you're using. Let's say one block is worth $15. Divide your monthly income by that amount. So if you earn $2,600 a month, that's about 173 blocks. Count out 173 green income block. Then the number of blocks/nuts in front of each card that represents that expense. So if you rent is $1,500/mo that's 100 block in front of that card. Do that with all your expense categories. Do you run out of blocks before you run out of expenses? Then use yellow blocks, or almonds if your using nuts. This will make any shortfalls stand out.
Now step back and really look at it. Think back to your top 5 values you wrote down earlier. Do these piles reflect your values and what's important to you? Can you rearrange them by cutting in some places and adding more to other expenses to better meet your values and eliminate the yellow blocks. Put the new dollar amounts on the other side of each expense card. Here's you new, special you, budget.
Does your income or expenses change? Do the exercise again. Priorities and goals shift? Repeat. Keep going this way in life and you can put YOUR money where YOUR heart is.
Want to buy a kit to use? Maybe you ate some of your peanuts? You can purchase one here:
https://livewealthynow.com/shop/
Other resources , lke the Values Worksheet can be downloaded here:
https://livewealthynow.com/resources/
I love questions and suggestions for upcoming podcasts. Please reach out to me at [email protected]
Or on our website:
https://www.moneypilotadvisor.com/