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September 29, 2012 Comments Off on Financial Tips for Coaching Families

Financial Tips for Coaching Families

In my experiences working with coaching families I have developed a unique understanding to the challenges these families face.  Below is a list of tips all coaching families should be aware of. 

In most circumstances, coaches should choose to enroll in the Optional Retirement Plan instead of the Pension, also known as the Teachers Retirement System.  Pensions typically have a longer vesting schedule which means you must be employed by the school for a specific period of time, sometimes as long as ten years, in order to receive the university’s contributions to your retirement plan.

As of 2011, it is hard to advise clients to purchase a new home when they move.  The one thing you need to increase your chances of making money from housing is time which is the one unknown as a college coach.  The housing market has many issues to resolve before housing prices can fully appreciate as they have in the past.  When you include the sales commission of 6% plus the potential risk that you carry as a homeowner, it would be very difficult to make significant money over the next few years.

Always put the monthly bills in the name of the non-coaching spouse.  In the event that a bill goes unpaid or there is a discrepancy with a previous payment, any problems with your credit will be contained.  One credit discrepancy can cost you hundreds every month on your mortgage and utilizing this method gives you the option of applying for credit without the credit issues.

Be aware that any money deposited into the TIAA Traditional investment has unique distribution rules.  In most cases, this portion of your retirement can only be taken in 10% increments meaning it will take ten years to withdraw this money.  This investment is essentially a higher yielding bond issued by TIAA CREF so it carries risk similar to a typical bond fund.  I always advise my clients to avoid the Traditional investment.

When changing jobs voluntarily, you will want to ensure that you a not taking a “silent pay cut.”  It is possible to receive a higher income a lower standard of living due to variations between the two locations in contribution rates, taxes, health care and transportation costs, and housing, to name a few.  Always find out the retirement contribution rates, vesting schedule, whether the new employer contributes to social security, state and local tax rates, utility rates, and house values.  Having this information will allow you to make a more well-informed decision.

If your summer camp money is not paid through the university but instead is included as self-employed income, be aware that you have the ability to contribute 25% of that income ($49,ooo max) into a SEP IRA as a pre-tax retirement contribution.  Utilizing this vehicle allows you to save for retirement while simultaneously reducing your tax liability.  Also be aware that any expenses you incur may be deductible as a business expense which you should discuss with your accountant.

Saving For Your Child’s Education

Paying for college can be one of the largest expenses in your financial life.  It can also be one the best investments you will ever make for your family.  Estimates for the cost of college can vary widely depending on the age of your child, whether they would attend a public or private college, and what level of degree they plan on attaining.

The first step in determining how to save for college is to determine how much of the expense burden do you want to cover for your child.  Some parents believe that their child should share in the expenses for their college education as a way to motivate them.  Other parents believe that graduating from college debt free is the best gift they could give to their child.  Some parents cover the cost of an undergraduate degree and expect the student to cover any additional degrees.  One approach is not better than the others but instead is a parental choice that you must make prior to saving for college.

By 2030, the average four year cost of college is estimated to be $135,000 for a public institution and $285,000 for a private school.  In order to fully fund college at these levels, you would need to save about $300 / mo for public and approximately $600 / mo for private for the next 19 years generating a return of around 7% each year.  Depending on your cash flow, you may not be able to afford this monthly outlay but the key is to begin to save whatever amount is currently feasible.

Once you have established the parameters of savings for your child’s education, you have several account options available to you that provide tax benefits.  The most common account used to save for college is the 529 College Savings Plan.  Contributions into 529 plans offer a current year state tax deduction (subject to limits,) earnings grow tax deferred, and withdrawals for college expenses are made tax free.  In order to receive the state tax deduction, you must open a 529 account with your state of residence.  In the event you were to move out of state, you can open a 529 account with your new state and roll your existing funds into the new account, in most cases.

Since 529 plans differ from state to state, their investment options do as well.  Some states have limited investment options only offering aged-based portfolios where the investments are designed to become less risky as the child nears college, while other states have an expanded list of quality mutual funds to choose from.  Consult with your advisor to determine which investment approach is best for you.

Tax free withdrawals can be made from 529 plans to cover an expanded list of eligible expenses.  In addition to tuition and books, eligible expenses include computers, internet access, and even off campus housing.  To the last point, most schools are migrating towards using a fixed dollar amount that may be withdrawn tax free based on the cost of living in their location.

Aside from strictly saving for college, 529 plans can play an important role in managing your long term wealth.  They offer extensive estate planning flexibility and benefits that you should discuss with your advisor.  Strategies to reduce or even eliminate your state tax liability can be achieved with the help of your accountant.  It is important to understand the limits on contributions and deductibility before enrolling in a 529 plan.  While you have the ability to bring any excess 529 funds back into your estate, there are tax penalties associated with doing so.

For additional information on saving for your child’s education, please contact Scenic Wealth Management.

November 17, 2010 No Comments

Health Savings Accounts (HSA)

With the skyrocketing cost of health care, many investors are using Health Savings Accounts (HSAs) to supplement their lifetime health care expenses.  HSAs offer certain tax benefits and may play an important role in managing your long term financial health, as well.  However, not everyone is eligible to enroll in a HSA so it is important to understand who qualifies and how the account can be used in coordination with a long term financial plan.

Simply put, a Health Savings Account is a tax advantaged savings vehicle specifically designed to help cover lifetime medical expenses.  Tax deductible contributions made into the account grow tax deferred and may be withdrawn tax free to cover eligible medical expenses.  Balances remain in the account from year to year and at your death your spouse may continue to use the HSA for their benefit.  Where permitted by the custodian, funds may be invested in a wide variety of mutual funds potentially producing market returns.

In order to be eligible to open a HSA you must be enrolled in a High Deductible Health Plan (HDHP,) you cannot be enrolled in Medicare, you cannot be claimed as a dependent, and you cannot have any other primary health coverage.  However, vision, dental, disability, and long term care policies are allowed with a HSA.  In most circumstances, HSA owners may also have insurance against a specific illness or disease such as cancer.  Prescription drug plans are allowed but only if no benefits are paid until the annual deductible is met.  HSA accounts are opened as individual accounts; joint accounts are not allowed.

A HDHP is a health plan that has a higher than normal deductible and a maximum out-of-pocket expense within guidelines set annually by the IRS.  In 2011 the minimum annual deductible to be eligible is $1,200 with maximum out-of-pocket expenses set at $5,950.  In some cases, HSAs are made available to group plan participants but in many cases HSAs are used primarily by the self-employed and small business owners.  If you are a participant in a group plan, check with your Human Resources department to see if you are eligible.

Contributions made to an HSA are tax deductible if made by an individual and are considered excludable income if made by your employer.  The IRS sets annual contribution limits ($3,050 self, $6,150 family in 2011 with an additional $1,000 if over age 55) with any excess contribution subject to a 6% excise tax.  Contributions to a HSA must be made in cash and the IRS even allows a non-deductible funding distribution from a Traditional or Roth IRA.  You have until the tax filing deadline (April) to make prior year contributions.

Most medical treatments are eligible expenses and may be covered by your HSA balance.  Eligible expenses generally include any expenses that would qualify for the medical and dental expenses deduction on your tax return.  However in most cases, insurance premiums are not considered an eligible expense and must be paid for out-of-pocket.  Recordkeeping is important when using a HSA to ensure compliance with the IRS.

These benefits make Health Savings Accounts a valuable element to any prudent financial plan, if you are eligible.  Health care expenses may account for hundreds of thousands of dollars in your lifetime so establishing a long term funding vehicle with tax benefits may prove beneficial.

If you would like more information on HSAs or how to become eligible for a HSA please contact Scenic Wealth Management and be sure to discuss any tax questions with your accountant.