Episode 43 Save More

04/27/21 • 17 min

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.

Previous Episode

Episode 42 Post-COVID Habits

Today I thought we'd talk about post-COVID spending and savings habits. An article popped up in my inbox this week by Samantha Lamas, a content author at Morningstar on this topic. I'll put a link to the article in the show notes. We'll take a look her thoughts and see how they can help us maintain some of the good habits we may have developed during the COVID restrictions. COVID may have helped you build some good money habits Now, as restrictions are being lifting, ti may be some of us ditch good new habits, and go back to spending more and saving less again.

As Samantha pointed out, making a new habit stick depends on how difficult is it to maintain better behavior, what’s your environment, and what incentive is there to maintain the new behavior? During the pandemic, COVID restrictions acted as sort of environmental fix where you were shielded from temptations of overspending at, in-person settings. Not being able to spend as much, no matter how much you missed it, may have helped you save money during COVID for other goals that are also important to you.

If you who would like to continue curb your spending and build your savings, there's three areas to explore. Identify the good behaviors you've picked up during the past year. Write down those you'd like to stick with in the future and why this is good for you. You’re What and you’re Why. If you like to stay in shape and go to sports events with friends and saved money on gym membership because it’s closed, you’re exercising outside, and training at home. Would you like to continue that money saving habit? Skip the gym membership and use that money to buy tickets to a few games . Link that healthy, free exercise habit you want to maintain to the goal of attending some sporting events with friends again. T

The second step is to prepare. It's important to acknowledge that this COVID environment may have helped us stick to our new spending and savings habits. Try to think what's important to you about these behaviors you want to curb. Then come up with a new strategy to meet those needs .Say you enjoyed going out and eating with friends fefore and didn't mind spending on an expensive dinner,you really enjoyed it. But you would like to save for another priority. Thiink about what it is you really loved about that dinner out? What need does that meet for you? Is it the food itself? The service? Or was it you just really enjoy spending time with your friends? If its seeing friends, maybe get together just as often, but at budget friendly restaurants or invite friends over for a home cooked meal instead. Is it the food and atmosphere you love? Maybe you enjoy that experience a little less often in order to save for something else.

Okay, so third thing mentioned in the Morningstar article is called the block to help prevent that is to literally create a barrier to the action you're trying to avoid. An example of a block, could be you implement a three-day wait rule, where you agree to wait for three-days before acting on a money decision. This might help you from making spontaneous purchases that you then have buyers regret about later and give you some breathing room to think about your Why.

And when you finally can get back out there again have fun and love life, with no regrets.

Some content from “How to Help Clients With Their Post-Pandemic Spending and Savings Plans”, Samantha Lamas, Apr 19, 2021, Samantha Lamas is a content author at Morningstar

https://www.morningstar.com/articles/1034108/how-to-help-clients-with-their-post-pandemic-spending-and-savings-plans?utm_medium=referral&utm_campaign=linkshare&utm_source=link

Next Episode

Episode 44 Capital Gains Tax

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

Money Pilot Financial Advisor Podcast - Episode 43 Save More

Transcript

Unknown00:00:10.349

Welcome to the Money Pilot Financial Advisor Podcast, where you team up with Money Pilot founder, former Army helicopter pilot and your host, Katie Cannon, to put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and lead your financial life.

Kathleen Cannon00:00:44.189

Hello, everyone, and welcome back to the podcast. You may remember that in Episode 39, stash the cas