529 to Roth IRA Conversions Under New Cares Act 2.0 Rules
Under the Cares Act 2.0 passed in December, savings from 529 education savings accounts can now be rolled over to a Roth IRA (starting in 2024).
This is an important update for parents or grandparents saving for their children or grandchildren’s future. A major concern with 529 accounts has always been “what if my child/grandchild doesn’t end up going to college”? Previously this would have triggered income tax and a 10% penalty to distribute that unused money. Under these new rules, the balance could now be rolled over to a Roth IRA for the beneficiary of the 529 (in this example the child/grandchild).
Under the Cares Act 2.0 passed in December, savings from 529 education savings accounts can now be rolled over to a Roth IRA (starting in 2024).
This is an important update for parents or grandparents saving for their children or grandchildren’s future. A major concern with 529 accounts has always been “what if my child/grandchild doesn’t end up going to college”? Previously this would have triggered income tax and a 10% penalty to distribute that unused money. Under these new rules, the balance could now be rolled over to a Roth IRA for the beneficiary of the 529 (in this example the child/grandchild).
This new rule creates a few major opportunities for savers:
You can take advantage of 529 account tax advantages to save for a child’s future education without as much concern you may be penalized in the future.
You could use a 529 as a “stealth Roth account” for a child to get savings growing tax-free for them long before they have an income that would allow you to fund an actual Roth IRA for them. An extra 15 to 20 years of compounding gains is a powerful thing!
In the “stealth Roth account” situation you may get the dual-benefit of state income tax deductibility as a bonus (this applies for states with income tax that allow a deduction for 529 contributions and assumes they won’t tax 529 conversions which is yet to be determined).
Open a 529 account for a child immediately and fund it with $1 or $25. This gets your 15 year conversion clock going (details on this below).
If your child received grants or scholarships that cover most of their costs they can be rewarded with a head start to their retirement savings by converting their 529 balance to a Roth IRA.
If you’re fortunate enough to be able to pay for your child or grandchild’s college out of pocket without using all of their 529 account, you could choose to transfer up to $35,000 to a Roth IRA for them instead of using it for college expenses.
Because this is the US Congress and tax code they couldn’t let it be toooo simple… there are some important rules to understand:
Funds must roll to a Roth IRA for the beneficiary of the 529 plan. If the 529 beneficiary is your child, that means it must roll to a Roth IRA for your child. Quick note - changing the beneficiary of a 529 is quite easy, congress and the IRS still need to clarify whether you could get around this provision by making you or your spouse the beneficiary of the account thereby allowing you to roll the 529 funds to a Roth IRA for you or your spouse.
Funds must be moved directly from the 529 plan to the Roth IRA, you can’t take the distribution as a check from a 529 and then separately go deposit to a Roth for the beneficiary.
The 529 plan must have been maintained for 15 years or longer before funds can be rolled over to a Roth IRA. Because of this requirement, I would strongly recommend most people open a 529 for a child when they are born and fund it with the minimum amount allowed (for example $1 or $25). This “starts the clock” toward the 15 year requirement in case you ever need to use this provision in the future.
The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000. This means you still don’t want to “overfund” a 529 account if you’re worried the beneficiary may not end up using the money for college.
Any contributions made in the past 5 years (and the earnings on those contributions) are not eligible to be moved to a Roth IRA. This doesn’t mean you can never move those funds, you just have to wait until they’ve been in the account for 5 years until you do.
Conversions from a 529 to a Roth IRA count toward the annual contribution limit for Roth IRAs ($6,500 for 2023). So only $6,500 could be converted in one year and no “regular” Roth contributions could be made if $6,500 was converted. If only $5,000 was converted during the year for example, the beneficiary could still make $1,500 in “regular” contributions for the year. This means to convert the full $35,000 lifetime limit would likely take 5 or more years.
Income limits do NOT apply for these conversions. Even if the beneficiary is over the income limit to make “regular” Roth IRA contributions, a 529 rollover to their Roth IRA would be allowed.
The beneficiary must have earned income equal to or greater than the converted amount. For example, if you want to convert $6,000 from a 529 to a child’s Roth IRA they must have at least $6,000 in earned income. If they only have $2,000 in earned income you can only convert $2,000. These are the same rules that apply for “regular” Roth contributions. Many kinds of income can qualify including summer jobs, babysitting, etc. If in doubt, consult a tax professional.
I know, that’s a lot of fine print and may be a bit confusing! I’d strongly suggest reaching out to an advisor if you think a 529 to Roth conversion may make sense for you or if you have questions about how this may impact you. I’m always available to answer questions by phone at 616.594.6205 and email at ryan@ffadvisor.com.
3 Steps to Turbo Charge Your Health Savings Account (HSA)
One of my favorite tax strategies for college professors and others is a Health Savings Account (HSA) offered through your workplace. Read more about three steps to take full tax advantage of your HSA: 1) make maximum contributions, 2) invest in stocks and bonds, 3) delay withdrawals as long as possible.
One of my favorite tax strategies for college professors and others is to take full advantage of your Health Savings Account (HSA) offered through your workplace. These accounts are WAY BETTER at saving taxes than 401k and 403b retirement accounts. You probably know that contributions from your paycheck are tax deductible just like contributions to retirement accounts. However, unlike retirement accounts, withdrawals are tax free for qualified medical expenses. Another unique advantage of HSA contributions is that they are exempt from social security taxes. Here are three steps to increase the value of your HSA.
Step 1: Make Maximum Contributions. Many people set their annual contributions to match their annual insurance deductible. For example, your annual medical deductible might be $3,000 so you decide to contribute this amount to your HSA each year. After all, this is what you expect to pay out of pocket for healthcare. If you are lucky and healthy, you might even pay less during the year. So why save more each year? Answer, to build a healthy surplus. No pun intended 😊
Consider this example: Suppose you are married with a family income of $130,000. You choose to make the maximum contribution of $7,300 to your HSA (for 2023). The contribution is not subject to federal income tax (24%), state income tax (4%), social security tax (6.2%) or Medicare tax (1.45%). Your $7,300 contribution saves you $2,600 in taxes this year. But the story gets better!
Step 2: Invest in Stocks and Bonds. You may not realize that you can invest your HSA funds in stocks, bonds, and other investments. Your money does not have to stay in a boring savings account earning less than 1%. These investments will likely provide a better return over many years. Granted, you are restricted to the specific investment options available through your workplace, but it is worthwhile knowing your options.
Step 3: Delay HSA Withdrawals. The final step to really take advantage of tax-free growth is to keep these funds invested for as long as possible. Pay healthcare expenses out of pocket each year, if possible, and let your HSA account continue to grow. Think of your HSA to be a retirement account for healthcare that you let grow until age 65.
Consider the example of a married couple in their 40s who contribute $7,300 each year and invest the account in a conservative portfolio of index funds and exchange traded funds (ETF) that could earn 7% per year. The account would grow to almost $300,000 after 20 years. These funds are then withdrawn completely tax free to pay qualified healthcare expenses during your retirement years. Yes, this is a best-case scenario that will be difficult to achieve but the approach yields benefits even with less rosy assumptions. For example, you may still have a tidy $150,000 for healthcare during retirement by saving half of the maximum contribution each year.
Your Homework: As a college professor, my natural inclination is to assign homework to ensure students take positive actions. So here is your homework! Review your HSA investment options and consider increasing your annual contribution to the maximum. When possible, pay for healthcare out of pocket and let the HSA account continue to grow tax free. Consider your HSA as a retirement account for healthcare. You will have plenty of healthcare expenses later in life so why not start saving now?
I have been a college professor for almost 30 years and now I teach other professors how to graduate from academic freedom to financial freedom. Sure, investments are important. But it is just as important to minimize taxes, moderate personal debt, live below your means and use insurance wisely to prepare for the unexpected. Review my approach to financial advising and schedule a no obligation introductory call by clicking here. We will discuss your financial worries, answer questions, and then you can decide if working together makes sense.
Inflation Is MUCH Lower Than You Think
The media and the average person misunderstand and misinterpret inflation for two important reasons:
They focus on the ANNUAL reported inflation number which tells you what has happened over the past year but not where inflation is headed.
The SHELTER component of inflation which measures rents and home prices makes up about one third of overall inflation but lags real-time housing data by up to 12 months.
The most recent inflation report that was published on 12/13/2022 makes an excellent illustration of these two points. Understanding the nuance of inflation reports and where we are headed rather than where we have been is key for setting expectations for how much further and how quickly the Fed will continue to raise interest rates as well as how long rates will remain elevated.
The media and the average person misunderstand and misinterpret inflation for two important reasons:
They focus on the ANNUAL reported inflation number which tells you what has happened over the past year but not where inflation is headed.
The SHELTER component of inflation which measures rents and home prices makes up about one third of overall inflation but lags real-time housing data by up to 12 months.
The most recent inflation report that was published on 12/13/2022 makes an excellent illustration of these two points. Understanding the nuance of inflation reports and where we are headed rather than where we have been is key for setting expectations for how much further and how quickly the Fed will continue to raise interest rates as well as how long rates will remain elevated.
Annual CPI (consumer price index) tells us how much prices have gone up over the past year as a whole.
This is the figure most often reported by the media. As shown in the line chart below, this figure peaked in June of 2022 at just over 9% and has been trending downward ever since to its current level of 7.1% (as of November 2022). This annual figure is calculated by taking all of the monthly increases for the past year (each of the bars in the bar chart below) and adding them together. For example, if you take all of the bars in the bar chart and add them together, you get that 7.1% current ANNUAL inflation.
This is great for telling us what happened over the past 12 months, but it’s a very bad way to measure what is happening right now. On the way up, the annual figure lags the real-time situation making it harder to see inflation heating up, and on the way down it lags the real-time situation making it hard to see inflation cooling down. Later we’ll see how the lag in rent and home price data makes this problem even worse.
A better way to understand what is happening right now is to ignore the ANNUAL number and instead ANNUALIZE the most recent 3-6 months of data. A couple of examples. If you take the most recent 6 months of data (June through November) you get a 4.5% annualized inflation rate. That’s much lower than the 7.1% figure for the past 12 months. If you take 5 months of inflation data (July through November) you get a 2.4% annual inflation rate. If you take the last 3 months of data you get a 3.6% annualized rate. These examples tell us that for the past 3 to 6 months we have been MUCH closer to the Feds official target of 2% annual inflation than most people believe.
It works the other way too - if you had taken the last four months of data when inflation peaked in June, you would have had an annualized inflation rate of 11.4%! This is much higher than the reported 9.1% annual figure.
Chart of annual cpi from bls cpi bulletin december 2022
chart of monthly cpi from bls cpi bulletin december 2022
Looking through this lens and understanding how annual inflation data lags what is happening right now shifts the narrative surrounding inflation. It didn’t just burst onto the scene a year ago and it hasn’t remained “stubbornly high” as the Fed has taken measures to push it back down to an acceptable range. According to the data, what actually happened was:
Inflation accelerated quickly as our economy reopened following the pandemic, particularly after the vaccine rollout in early 2021. The 3 month annualized rate (red line below) reached its first peak at 9.2% in June of 2021 while the annual rate that is broadly reported (blue line below) had just surpassed 5%. The Fed and many economists believed inflation would be transitory and inflation was not yet a “mainstream” topic.
Inflation remained elevated through it’s eventual peak in June 2022 but it wasn’t resisting the Fed’s efforts, the Fed just wasn’t doing anything. As the annual inflation rate caught up to the 3-month figure and gas prices spiked in January 2022, inflation became a hot mainstream topic (as evidenced by google search data).
As the Fed began to raise interest rates (yellow line below) in earnest with it’s first 0.75% increase in July 2022, the 3-month annualized inflation rate plunged into the range of 3% to 4% while the annual rate has lagged substantially in the 8% to 9% range. Ignoring this dramatic near-term decline and focusing on the much higher annual number would lead you to believe the Fed has “a lot of work left to do” when in reality the work may be nearly finished and the (lagged) data just hasn’t caught up yet.
chart was created using data from bls cpi bulletins dec 2018 - dec 2022, fed funds rate data from st louis fed
Home and rent prices accounts for a massive one third of CPI - but the way they are measured lags reality by UP TO 12 MONTHS
This is according to a paper written by the Bureau of Labor Statistics in conjunction with the Cleveland Federal Reserve Bank. An excerpt from their paper explains how large of an impact this has and why it’s such a big deal:
“Shelter is by far the largest component of the Consumer Price Index (CPI), accounting for 32 percent of the index. Accurate inflation measurement therefore depends critically on accurate rent inflation measurement, which is the primary input to both tenant and owner equivalent rent. It is therefore concerning that rent indices differ so greatly. For example, in 2022 q1 inflation rates in the Zillow Observed Rent Index (ZORI; see Clark (2020)) and the Marginal Rent Index (Ambrose et al. (2022)) reached an annualized 15 percent and 12 percent, respectively, while the official CPI for rent read 5.5 percent. If the Zillow reading were to replace the official rent measure in the CPI, then the 12- month headline May 2022 CPI reading of 8.6 percent would have read more than 3 percentage points higher.” (emphasis mine)
As the authors explain, if CPI had accurately reflected real-time data on home and rent prices, inflation would have peaked near 12%! Piling this huge lag for such a major component of CPI on top of a focus on the annual vs. near-term inflation rate puts policy makers and investors very out of sync with economic reality. Had the Fed paid more attention to the shorter-term trend and real-time data on rent and home prices sky-rocketing in the spring of 2021, they may have moved to raise interest rates 6 to 9 months sooner and curbed inflation at a rate of 5% to 6% rather than the near 10% rate we ultimately suffered.
This home and rent price lag is now working in reverse to create the illusion of higher inflation.
chart from st louis “Fred” website - data is published with a lag - sep 2022 most recent reported
Taking the principle above and applying it to our current situation, the rent & home price component of CPI today largely reflects the economic condition one year ago. At that time, the Fed had not even begun to increase rates and the average 30 year mortgage was around 3%. From June of 2021 through June of 2022, US home prices shot up by nearly 20% per the Case Schiller Index. That massive increase (which in reality happened in the past) will continue to feed through into CPI data making the rate of inflation look much higher than it really is. The reality is that From June 2022 through September 2022, home prices dropped by 2.6% or an annualized rate of 10.4% (September is the most recent data published by the Fed - the irony of this lag is not lost on me). So while home prices in reality are dropping, CPI data will continue to show robust price increases for its hugely important “shelter” component.
If you adjust the annualized 3-month inflation rate using CURRENT home price data, you see that inflation has slowed much more than official CPI data indicates.
If you replace the high growth rates the official CPI data use with zero growth in home prices over the past 3 months, the 3.6% annualized CPI rate we discussed earlier drops to just 0.85%. If you include the drop in home prices that the Case Schiller Index shows, the 3 month annualized rate of inflation drops even further to 0.2%! Both of these are well below the Fed’s target inflation rate of 2%.
Even if you strip out the recent price decreases for gas, energy, and used cars… without the lagged shelter component you’re still at just a 2.4% annualized inflation rate. All of this tells us that while some contributors to inflation like food, transportation, and some service industries may prove stickier and harder to bring back below 2%, if the current trend continues and no major geopolitical event occurs REAL inflation (ignoring that pesky lagged real estate component) is likely to remain in the 2% to 4% range.
The economists at the Fed aren’t stupid, they’re aware of the lag and impact of the real estate component. Heck, their own team wrote a paper on it! This should mean they factor it into their policy decisions and look through the noise in the data to the REAL economy. If they do, I’d expect the upcoming 0.5% increase to be the last large hike with the “final” rate topping out around 4.5%. Coincidentally, this is what the bond market is also predicting based on the current yield curve (12/13/2022).
MORE TO COME - I’ll be following this post shortly with another breaking down what this could mean for stock and bond markets in the coming year. In the meantime, I hope you enjoyed this trip down the rabbit hole of Inflation and CPI. Always remember, the media is a business. They are out for clicks and traffic, not to educate you. Scary headlines and political narrative sell. I encourage everyone to seek out the data and let it speak for itself or rely on trusted advisors who do the digging for you.
Footnotes
All CPI data is from official Bureau of Labor Statistics bulletins
Case Schiller home price data and Fed funds rate data is from the St. Louis Federal Reserve website
My own calculations of annualized data modified by adding/removing/adjusting specific components is based on archived CPI bulletins published by the Bureau of Labor Statistics from 2018 through November 2022.
Current 3-month and 6-month annualized calculations were based on the November 2022 bulletin detailed categories data from the BLS.
Home Renovations & How to Get the Biggest Return on Your Investment
How to decide what to renovate, how much renovations cost, cash versus home equity loans, your realistic investment return, and so. much. more.
Shauna Speet, owner of Shauna Speet Interiors, and Leanne Rahn, Financial Advisor with Fiduciary Financial, have teamed up to tackle some of the most burning questions when it comes to your house renos and their corresponding investment returns.
Shauna and Leanne fill you in on all the things like how to decide what to renovate, how much renovations cost, cash versus home equity loans, your realistic investment return, and so. much. more.
Jump into the conversation with them and leave feeling informed, educated, and motivated (with just maybe, a demo hammer in hand).
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How do I decide what to renovate in my home?
Shauna recommends making a master list - every house project that will require either time or money goes on the list. Then prioritize that list based on need vs. want, and the space that is functioning the poorest/or with the most worn-out materials gets the very top priority.
Other factors to consider when deciding what you want to renovate are:
How long do you plan to stay in the house?
What is the top value your house could be worth? You don’t want to out-renovate your neighborhood.
What are some tell-tale signs that I should renovate my space?
First, is it a want or a need? Does the space need to be renovated due to worn-out materials or poor function? If so, it would get top priority on Shauna’s list.
If the space functions well and the materials are in good shape overall, Shauna would recommend a purely cosmetic update and save the renovation budget for a more pressing area.
What if I don’t know if I’m going to stay in my house long-term? Does it still make sense to renovate?
If you aren’t planning on staying in your home for the long term, Shauna’s opinion is this: she does not think it’s worth the cost/life disruption to renovate if you plan to move in 5 years or less.
UNLESS - you can do a lot of the work yourself. If you need to hire out 90% of the labor, there goes your profit margin along with it! Sweat equity is what you can count on getting back.
Realistically, what is the return I can actually receive from renovating?
In Shauna’s experience, less than in the past. Things are more expensive now, and homes are selling for record highs even without the updates. So talk to your realtor before renovating the kitchen just to sell the home, it is probably not worth it. (BUT - if you are thinking of removing a wall to open up the kitchen, or ADDING a bathroom, those improvements yield a significant return.)
Is putting money into my home considered a good investment?
Leanne challenges you to ask yourself this: what are you after? Is it renovating to stay in the home longer? If yes, what is your current mortgage interest rate? It might make sense to renovate and stay in the home longer than to sell and buy a home with a higher interest rate.
Maybe is it renovating to add more value to your home to be able to sell it? If that is the case, how much will it add to the selling price? What is the market like?
These are just a couple of scenarios. This answer is definitely very situational. Investing in your home can be a very good investment! It really depends on what your goal is.
How can I estimate how much the renovation will cost?
Google! Google the average square footage of everything you can. Things like the Flooring/tile/counters/backsplash you want and then multiply that by the surface area of each material. That will get you a ballpark for materials.
Once you have that number, add 75% - 100% of the cost of materials for the labor to install all those items (if you plan to have a builder manage the project for you).
Lastly, add in the cost of the appliances/bathroom fixtures you want, as well as an approximate cost for cabinetry (also by googling!), and that gives you a rough preliminary budget.
Should I save up the full amount prior to starting a renovation or should I take out a home equity loan/HELOC?
This is a very situational answer and depends on what the alternative is. Maybe you have been in the home a few years and built up some equity, your mortgage rate is good, and renovating by utilizing a home equity loan/HELOC would allow you to stay in the home for a few years. Looking at today’s rates, Leanne might say it may make more sense to take out a home equity loan/HELOC and keep your current mortgage rate rather than go out and buy a home (which has a good chance of being priced higher) at a higher interest rate.
Maybe you are debt adverse and you have the extra cashflow plus your renovating timeline isn’t a rush. Then it may make sense to just aggressively save up for your renovations.
Overall, the main variables Leanne thinks affect this answer would be your timeline, your mortgage rate, the current housing market, the home equity loan/HELOC rates, your cashflow, your feelings toward debt, how much equity you have in your home, and your renovation estimated costs.
What are the steps to start saving for a renovation?
Know a rough estimate of costs (like Shauna mentioned, Google!).
Get on the same page as your spouse and be transparent about the all-in costs and your realistic savings timeline. Take a look at your budget and cashflow - are there ways to cut expenses to reach your goal sooner? If there aren’t ways, take that into consideration when determining your realistic timeline or be creative on how you can earn extra income to throw at your savings goal.
If you have a timeline longer than 3 months, consider chatting with Leanne about ways you can give your savings a chance to grow. If you have a more immediate timeline, look to utilize high-interest-earning checking accounts (think LMCU and Consumers Credit Union to name a few).
Stay motivated! A big savings amount can feel daunting and you may feel impatient with the thought of saving. Write out your goals and hang them on your fridge, create a mood board and hang it up in your office, schedule “money dates” with your spouse to go over your budget and get an update on your savings. Being intentional about this is key!
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Maybe your demo hammer is staying in the garage a little bit longer or maybe it’s in hand right now. Either way, Shauna and Leanne are here to support you and give you guidance.
Be sure to check out shaunaspeet.com for renovation guides that walk you through the whole planning and hiring process of a renovation as well as a Custom Home Analysis. Shauna personally analyzes your answers you provide to a questionnaire she sends, as well as images of your home and your Pinterest boards. She then provides you with a custom report on your personal design style and the architectural style of your home.
Leanne is ready to build new relationships by giving you personal, tailored guidance on cash savings, home equity loans/HELOC, helping you grow your savings, and preparing for the short AND long term.
What are you waiting for? Dream like Joanna. Demo like Chip.
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
About Shauna…
Shauna Speet, owner of Shauna SpeetInteriors, is an interior designer focused on studying and educating homeowners on the function of a home. She has devoted her focus to identifying functional pain points and creating solutions to solve them.
Shauna lives in the lakeside town of Holland Michigan with her husband, two children, and their energetic golden retriever Coby. They all enjoy being on the sandy shores of Lake Michigan in any season - especially Coby! 🐶
About Leanne…
Leanne Rahn is a Fiduciary Financial Advisor working with clients all over the US. If you don’t know what a Fiduciary is, Leanne encourages you to look it up (or even better - check out her website!). She swears you won’t regret it. Women entrepreneurs, newlyweds & engaged couples, and families who have special needs children are Leanne's specialties.
She loves a good glass of merlot, spending time with her hubs and baby boy, and all things Lake Michigan. She could listen to the band Elevation Worship all day long and is a sucker for live music.
Here, at Fiduciary Financial Advisors, we take our fiduciary oath seriously. We hold these five principles:
I will always put your best interests first
I will avoid conflicts of interest
I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional
I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.
I will fully disclose, and fairly manage, in your favor, any unavoidable conflicts
Why Is Your Cash In The Bank?
Typically, people keep money in the bank for three reasons: 1. Safety 2. Return (interest) 3. Accessibility. In the current environment, short-term bonds actually beat banks on two of those three criteria and aren’t far off on the third.
NET OUT - If you’re willing to hold a treasury bond until the end of it’s term, you know the minimum return you will receive, the only risk of loss is if the US government defaults on its debt, and your bond has the potential to do better than expected if interest rates drop.
Why is your cash in the bank? This question may sound absurd… where else would it go? Under my mattress? The truth is, few people understand bank deposits and bonds well enough to know that they have other options, and those options may actually (at the moment) be much better.
Typically, people keep money in the bank for three reasons: safety, return (interest), and accessibility. In the current environment, bonds actually beat banks on two of those three criteria and aren’t far off on the third.
SAFETY - Treasuries are even safer from default than bank accounts.
This is especially true if you have a large amount of cash. Don’t get me wrong, FDIC insured banks are a very safe place to keep your money. The FDIC automatically insures up to $250,000 per depositor with the full faith and credit of the United States government. However, above that limit, cash is only secured by the faith and credit of the bank institution itself.
In contrast, every treasury bond is backed by the full faith and credit of the US government with no limit.
What about all that debt our government is racking up, how can I trust that they won’t default? I won’t get into this argument other than to say that the US government is almost universally considered to be the least likely institution in the world to default. Further, if you don’t trust the US government to pay their debts, you shouldn’t trust FDIC insurance either. Remember, FDIC Insurance is just a promise by the government to pay depositors (up to $250k) if the bank fails to do so.
The net out is that for the first $250,000, banks and treasury bonds have essentially the same risk of default and above $250,000, treasury bonds have less risk of default.
RETURN - Bonds (finally) offer a decent return while interest paid by many banks has hardly increased.
As of 11/10/2022, the average savings account yielded 0.18% APY (per bankrate). Fortunately some banks pay a higher rate up to 3% or 4% but typically the amount allowed to earn this higher rate is limited to $10,000 or $15,000. These can also come with obnoxious requirements to have enough direct deposits or debit card purchases. CD’s are better, yielding on average 1.15% with the best available rate at 4.1% per bankrate.
In contrast, as of 11/22/2022, 1-month treasuries yielded 3.97% and 1-year treasuries yielded 4.75% (per treasury.gov). Unlike many high interest bank accounts, there is no limit on how much you could invest at those rates and no special rules or hoops to jump through.
ACCESSIBILITY - Bonds can be sold and converted to cash in a matter of days.
It’s hard to beat a bank account for convenient storage and access of your cash. That’s what modern checking and savings accounts are for. However, this convenience and accessibility comes at a price. Because you can demand your cash from the bank at any time, they must keep a large amount of money in reserve. They can’t lend or invest those reserves which means they can’t generate profit from them. This is at least part of the reason banks offer pretty stingy rates on your accounts or cap the amount that can receive a high interest rate (think LMCU or Consumers Credit Union).
CD’s take a different approach. You promise the bank you won’t touch your money for several months or years and, because they know when you will receive your money back, they can use your deposit to lend, invest, and otherwise make money. In return, they pay you a higher rate. The major drawback is the contract you make not to touch your money until the term is up. Your money is essentially locked up so you better know you won’t need it until the agreed-upon date.
This is where short term Treasuries at today’s rates shine. There is a large and highly liquid market for US treasuries, meaning they can easily and quickly be sold and turned into cash if needed. This process should take only a few days. So, not only do short term treasuries currently have a higher return than CD’s, they’re a much better investment if you may want or need your money within the next few months or years. Some typical situations that require this are cash set aside for a home purchase or business investment, for a future tax bill, or to generate some return while buying into the stock market over time (dollar-cost-averaging).
The value of your bonds can go down if they’re not held until the end of their term.
This is a major difference from bank accounts or CD’s where the value of your account doesn’t fluctuate based on markets or interest rates. When interest rates rise quickly as they have this year, bond prices drop. This is because new bonds being issued as rates continue to rise pay a higher rate than bonds issued 3 months, 6 months, or 1 year ago. Naturally, if you want to sell your old bond that’s paying a lower rate than bonds issued today, buyers demand to buy them at a discount so that their total return if they hold the bond until the end of its term is the same as a bond purchased today.
Here’s the good news, this risk of your bond dropping in value only exists if you sell it before the end of its term. If you hold your bond until it matures you know exactly what your return will be because the US government will pay you its initial value plus your interest. This is one reason holding actual bonds can be preferable to bond mutual funds or etfs. Bonds are more complex to buy and sell but you can lock in specific terms, return rate, and you are in control of if and when to sell a bond or hold it to maturity.
Some more good news, short-term bonds for 1 month, 3 months, or 6 months change much less dramatically in response to interest rates than longer term bonds like 10-year or 30-year treasuries. AND, to top it off, short term bonds are currently paying higher rates of return than long-term bonds (thanks to an inverted yield curve which is a somewhat rare phenomenon and a topic for another time).
Lastly, this price movement can also work for your benefit. If interest rates drop, the value of your bonds will increase meaning you could sell them prior to maturity for a better return than you expected. The net out is that if you’re willing to hold a treasury bond until the end of it’s term - you know the minimum return you will receive, the only risk of loss is if the US government defaults on its debt, and your bond has the potential to do better than expected if interest rates drop.
Don’t just throw away your investments and strategy to go buy short-term bonds!
Yes short-term bonds are currently a great option FOR A SPECIFIC PURPOSE. If you’re looking for a place to safely park cash that you may need in the next few months or years and make a decent return… short-term bonds sure seem to beat the bank. If you’re saving for a far-off goal, 4% to 5% return likely isn’t the best you can do. Over long periods of time, stocks and long-term bonds have historically outperformed short-term bonds. If you have a strategy, stick to it. If you’d like a strategy, please reach out. You can reach me by email at ryan@ffadvisor.com or cel phone: 616.594.6205.
Footnotes
Bank & CD Rates per bankrate on 11/22/2022
Bond rates per Daily Treasury Par Yield Curve Rates on treasury.gov - 11/22/2022
How to Save Money on Your Next Family Vacation
Tips to maximize your vacation savings, destination advice, flight deals, and more!
This month, I had the opportunity to sit down, interview-style, with Travel Advisor, Sarah Allen, and get all the secrets on how to save money on your next family vacation. She shares some amaaazzing tips that will help you decide how to choose your destination, the best way to book flights, how timing can play an impact, and more. Keep reading and by the end of this, you’ll be packing your bags!
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L: Sarah - how in the world does a travel addict decide on their destination? Give us all the tips!
S: There are a few things to consider when choosing a travel destination. Time of year and weather may help guide your decision. Would it be too hot to enjoy hiking in Sedona in July? Christmas at Disney is beautiful but it will be very busy so if you don’t like crowds you should go during an off-season time.
You should also consider the age of your children. Are they too young for long hikes? Would they enjoy the museums in a large city? I suggest making a bucket list of all the trips you’d like to take. Then decide how much money you have to put towards travel each year.
Next, plot these ideas in a calendar based upon your budget and life stage.
L: Okay, so once a destination is decided, how far in advance should someone start planning?
S: It really depends on where you are going, how flexible your dates are, and if you need time to save up for your trip. Cruise lines and major theme parks release dates over a year ahead of time and if you book when those dates are released you will have the best chance of booking the resort and room category you are looking for. Prices will likely be the lowest when dates are released and a good Travel Agent will watch for promotions that can be applied to your stay if money can be saved.
If you are traveling at a busy time of year like Christmas or Spring break or even summer break I would suggest booking at least 6 months ahead of time. Trips can be booked last minute but there may not be as many choices if you wait too long.
I have always enjoyed the anticipation of the trip almost as much as the trip itself so we tend to book early. This gives us plenty of time to save up the money we need and plan all of the details!
L: Let’s talk about the specifics: what are the benefits of booking your trip early? Would there ever be a benefit to booking late?
S: There are benefits to booking your trips early. You will have the most choices for accommodations and room categories if you book when dates are released. It is also a great way to save money on trips to places like Disney, Universal, and for cruises. If you book when dates are released you will likely get the best price available. If you use a Travel Agent they will watch for promotions that might save you money and can call in and modify your reservation for you at any time. Booking early also gives you time to save up for your trip, do your research, and anticipate all the fun you will have.
Conversely, you can sometimes find an amazing deal last minute. These don’t leave a lot of time for planning or saving money but if your life situation allows you to pick up and go at any moment it is definitely a budget-friendly way to travel.
L: Speaking of timing, are there certain times of the week or year to avoid OR take advantage of when it comes to airfare? Other secrets on how someone can save dollars on flights?
S: There are a couple of ways to save money on flights. Airlines generally release their flights about 6 months before your trip. I start off looking at sites like Kayak and Google flights to get an idea of what is available and then to the Hopper app to see the best time to book. Setting an alert on these services will let you know when prices drop.
If your dates are flexible you could also use a flexible date search tool and easily find the cheapest days to fly out.
My last tip is to look at all of the area airports. You might be able to fly out of a smaller airport nearby for less money or on a more convenient day. When it comes to booking the flight I suggest to do so directly with the airline.
L: Are there pros and/or cons to using booking sites like Kayak, Expedia, etc.?
S: I love using sites like Expedia and Kayak for research and sometimes they can save you money. It’s a great tool to get an idea of what hotels are available and I love the map feature! With a quick glance, you can discern the hotels with the locations you desire.
There are a few downsides. Often the rates on their hotel rooms are non-refundable. If I learned anything in the last 2 years it's that things don’t always go as planned and lately I am much more comfortable booking a room that I can cancel. Weigh your options and definitely check the cost of booking directly with hotels for the most flexibility.
If you book a flight with any of these third-party sites it is much more complicated to reschedule a canceled or delayed flight. When there is bad weather or staffing issues and 1000’s of people need to rebook, the airlines will rebook the customers who booked directly with them first. This could leave you stuck at an airport longer.
In this current climate, I suggest booking directly with the vendor.
L: What about travel insurance? Do you typically recommend this to your clients?
S: This is a timely question. Pre-covid, my family rarely thought about purchasing travel insurance. Life was fairly predictable and canceling a trip just wasn’t something you heard about very often. Since covid, my family has had to cancel or reschedule a number of trips. Some we had travel insurance for and some we did not.
I am not an insurance agent so my advice before buying a policy would be to read through the details closely. What does it cover? Consider the cancellation policy where you are going before purchasing additional insurance. If they will let you reschedule for another time, maybe you don’t need travel insurance.
Another thing to think about when buying travel insurance is your health and healthcare coverage. Are you older and traveling abroad? Maybe it would be a good idea to get a plan that would cover an unforeseen medical emergency.
L: Cruise vacations are all the hype. Is there value in them? Why would someone choose a cruise for their next vacay?
S: Cruising is a great option for families, couples, or singles to see and experience different cultures from the comfort and elegance of a massive ship. These boats are floating cities with luxurious amenities. The best thing about a cruise is that food and entertainment are included in the price of the cruise and both will be top-notch.
We went on our first cruise after renting a beach house for spring break. Shopping for and cooking 3 meals a day for my family wasn’t quite the vacation I had in mind. Sitting on the beach and watching ship after ship left got us thinking about other ways to vacation. We were surprised at how affordable a cruise was and no cooking!
Drink packages and excursion options will be an additional cost but you could stick to free beverages or you can stay on the ship and enjoy a quiet day to save money. Many ships also offer kids’ clubs and fun activities which will give parents some time to relax kid-free.
L: Okay, SUCH good info on cruises. What about another popular vacation destination - Orlando theme parks? Share with us your top budget-friendly tips!
S: 1. I had a friend help me plan our family’s very first trip to Disney World. I had been many times as a child but my family always stayed nearby with my grandparents and we only did one park per trip. I really didn’t think we could afford to stay on the property for a week. Then she told me about Disney’s value resorts! I had no idea we could stay at a Disney World property for those prices. The value resorts at Disney are not fancy but they are clean and have very fun theming.
2. When we travel to Disney or Universal we always bring simple breakfast foods with us or order groceries to be delivered to our resort. Having a quick, simple breakfast in our rooms saves us money and time. The resorts do have breakfast options available but it is often crowded and the cost of that for a family definitely adds up.
3. Brunch for lunch is a great way to save money on a more expensive meal like character dining. Sometimes we will book a reservation for a late breakfast and consider that our lunch and sit-down meal for the day, choosing a less expensive option for dinner.
4. It’s important to stay hydrated in the Florida sun but buying bottled water in the parks is expensive. Bringing in your own water bottles can save you money. I love the stainless steel Brita filter water bottle because you can fill it with ice and then water from any sink. You can also ask for free water at any quick service or snack location.
5. Souvenirs - set a budget ahead of time and communicate that plan to your kids or let them pick one thing in the parks. Have them save their money ahead of time for other things they may want while you are away. It’s good for your kids to learn the value of money and planning at a young age.
6. Purchase things ahead of time - PLAN AHEAD! Things like ponchos and sunscreen are expensive in the parks. We also buy themed shirts at Target, Kohls, or Amazon for our trip versus in the park.
7. Chase Disney Visa - we have had this card for years and earned 1000’s of Disney dollars to spend in the park. You can also use points toward flights. We have all of our recurring bills on this card and charge all of our purchases throughout the month. Please only consider this option if you plan on paying your full balance each month.
8. Disney gift cards - You can purchase packs of Disney gift cards at warehouse clubs like Sam’s and Costco. This is a great way to save up for your trip as you can use them to pay your balance or in the parks for food and souvenirs. Buying a pack or two a month will ensure you don’t spend that cash on other items. They will usually go on sale around Black Friday and you will be able to purchase them for less than their face value.
L: I’m taking notes! So good. Alright, Sarah, if you had to leave the readers with your TOP 3 tips on how to save money on their next family vacation, what would they be?
S: Number one: Book early with a Travel Agent - not only will you likely get the best price your agent will watch to see if there are any sales and can apply the sale price to your trip. This also gives you lots of time to save and anticipate!
Number two: Travel in the off-season - if you choose to go to Florida in September right after school starts or January when it may be cooler you will find the off-season rates apply. It will also be less busy.
Number three: Drive to your destination if it’s close enough and time allows. Buying airfare for our family of 5 adds up quickly. We look forward to our drive each spring break and even with gas, food, and a hotel stop we still end up saving about $1000 plus then we don’t need a rental car when we get there. A bonus is your kids get to see a lot of places while you are on the road.
L: Last but not least, Sarah: If someone wants to work with you, what does that look like? How can you help them plan their dream vacation?
S: I specialize in Disney trips, Universal trips, cruises, and all-inclusive resorts and have completed certification in each of these areas of expertise. When you book a trip with Fairytale Journeys by Sarah Allen you get my years of experience, planning, services, and support for free. Travel agents are compensated through commissions that hospitality companies include in their packages whether you use a travel agent or not.
We will start the process by talking about what you want your vacation to be like and then I will curate a trip just for you based upon your family's unique budget, wants, and needs. My job is to wade through all of the options, availability, dates, and insider knowledge and present you with choices that work best for you and your family.
Once the trip is booked I help families with the details of the trip, such as transportation, dining plans, theme park information, things to bring, etc. I’ve spent years acquiring this information through travel and research so you don’t have to! Things don’t always go as planned and when you need help on a trip it’s nice to know you have a friend and expert available to help!
Time is money and using a travel agent will not only save you time it will save you from being overwhelmed and frustrated.
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Tips from Leanne:
Check out the latest travel credit cards. Many companies offer incentives for opening a new credit card that could earn you free flights, money off your travels, cashback on gas, and more! Utilize credit wisely by not spending what you don’t have. Bonuses and freebies are great but what’s even better is not getting crushed by the weight of credit card debt.
Another great way to have your money work for you is by utilizing high-interest-earning checking accounts. Think Lake Michigan Credit Union, Consumers Credit Union, and others. Right now, you can find some credit unions and banks with checking accounts earning 3-4%. Use those earnings to bump up your vacation savings fund.
Speaking of your vacation savings fund, be intentional about it. Know you want to spend $5,000 on travel each year? Calculate what that equates to on a monthly basis and set it aside each month. This will encourage intentionality and lower the temptation to just “put it on the credit card” without actually having the cash to pay for it.
Have the cash but don’t know where you want to go yet or have longer than a 3-month timespan before you voyage off? Investing in a low-risk fixed-income vehicle might be an option for you. With the potential for rates being greater than your high-interest-earning checking account, this might be the perfect route to make your future vacation dollars work for you in your sleep (literally). Spark your interest? Leanne can chat with you to decide if this is a good move for you.
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Do you have your suitcase out yet? I tried to warn you your travel fever will be ignited by the end of this. Sarah Allen is your new go-to for all things travel. Keep these tips in your back pocket, right next to your passport.
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
About Sarah…
Sarah Allen is a Travel Advisor with Fairytale Journeys specializing in Disney vacations, Universal Studios, cruises, and some all-inclusive resorts. Helping families plan a trip that fits their needs and budget is her passion. She loves helping others make lifelong memories with their families. She, of course, loves to travel herself, and sometimes planning trips is as much fun as going on the trip itself.
Married for 22 years, Sarah and her husband have 3 teenagers and 2 Goldendoodles. Her family has been traveling since her kids were very young and she has passed on the love of exploration to them all.
W: https://www.facebook.com/ftjbysarahallen
P: 269-929-0055
About Leanne…
Leanne Rahn is a Fiduciary Financial Advisor working with clients all over the US. If you don’t know what a Fiduciary is, Leanne encourages you to look it up (or even better - check out her website!). She swears you won’t regret it. Women entrepreneurs, newlyweds & engaged couples, and families who have special needs children are Leanne's specialties.
She loves a good glass of merlot, spending time with her hubs and baby boy, and all things Lake Michigan. She could listen to the band Elevation Worship all day long and is a sucker for live music.
Here, at Fiduciary Financial Advisors, we take our fiduciary oath seriously. We hold these five principles:
I will always put your best interests first
I will avoid conflicts of interest
I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional
I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.
I will fully disclose, and fairly manage, in your favor, any unavoidable conflicts
Mega-Backdoor Roths Aren't Just For "Rich" People
There are many examples of situations where mega-backdoor roth contributions can be unexpectedly relevant but there are some overarching themes:
When the amount of money coming in during a year is significantly higher than usual
When your expenses are significantly lower than usual but your income hasn’t changed
When you’ve built up more savings than you need for your emergency fund and short-term goals
When one spouse has access to a 401k and the other working spouse does not
When many people learn about mega-backdoor Roth 401k contributions, they think to themselves, “this sounds like a great strategy for “rich” people”. Sure, it can be a lot easier for someone with a very high income to afford a $60,000 or $70,000 contribution every year and high earners are definitely a group that can benefit hugely from the mega-backdoor. But, there are two things I’d like to point out:
A lot of income doesn’t necessarily translate into a lot of disposable income or savings. Without the right money habits, people tend to spend more as they earn more and can even end up feeling like they have less of a cushion than they did when they earned less.
Income is just one part of a larger financial picture. Too many people never think beyond income and their basic 401k contribution to consider ways their savings, assets, debt, and expenses interact with and can complement those basic building blocks.
You could write an entire book on point #1 but I want to focus on point #2 with five examples of relatively common situations where, when you look at the whole picture, mega-backdoor contributions are attainable and can make a lot of sense, at least in a given year or time period. If you don’t have a clear idea of what your “whole financial picture” looks like, please reach out, that’s exactly what I’m here for.
You have a self-employed spouse. While there are several retirement account types available to self-employed individuals (we set these up often for new clients), many people either aren’t aware of them or feel it will be too complicated to set them up. In this situation it makes sense to think about your combined income and turn the spouse who does have access to a 401k into the super-saver of the family. If one spouse has no account to save for retirement, it can be pretty feasible for the other to be able to max out their 401k contribution and then use the mega-backdoor to boost savings even further.
You have extra cash after selling a home. With the massive increase in home prices some people are finding they’ve accumulated enough equity to have cash left over, even after making their down payment on a new home. Often people are unsure what to do with this cash and will let it sit in the bank earning nothing. Some may at least take the step of investing it so it can grow. But, that growth will be taxed. In this situation, maxing out a 401k and then making a mega-backdoor roth contribution is an ideal way to essentially shift that money into a tax-free account where it can grow and never be taxed again!
You have more in the bank than you need for your emergency fund. This could be a sign that you’ve been under-saving for retirement. If so, maxing out your 401k for a year or two and making extra mega-backdoor contributions is a great way to catch up, get that money growing, and avoid tax on that growth. If you have been saving enough and are still in this boat, layering on mega-backdoor contributions could help get you to retirement or financial independence sooner than you thought possible.
You had a windfall or unusually high compensation this year. Most people don’t win the lottery so more often this could be an inheritance, a gift from a family member, an unusually large bonus at work, a stock grant, or an unusually “good year” for commission-compensated workers. Often in these situations the income is unexpected and therefore not already “spoken for”. If you want to avoid the temptation of spending it just because it’s there, a mega-backdoor contribution is a great way to essentially shift this money to an account where it can grow tax-free.
You moved or made a life change that has reduced your expenses dramatically. As remote work exploded during the pandemic, some people have been able to keep jobs with “big city” or “coastal” pay while moving to areas of the country with a much lower cost of living. Others may have moved in with aging parents to help care for them and have seen their living costs plummet as a result. Maybe kids moved out or finished college that you were paying for. While maxing out your 401k may have been unobtainable before, it may now be a very real option to consider along with going even further and making mega-backdoor contributions.
There are many more examples of situations where mega-backdoor roth contributions can be unexpectedly relevant but there are some overarching themes:
When the amount of money coming in during a year is significantly higher than usual.
When your expenses are significantly lower than usual but your income hasn’t changed.
When you’ve built up more savings than you need for your emergency fund and short-term goals.
When one spouse has access to a 401k and the other working spouse does not.
If you need a primer on what a mega-backdoor roth contribution is and how to make one you can check out my summary blog post on this topic: Mega-Backdoor-Roth
2023 Contribution Limit and Tax Adjustments (mostly) Keep Up with Inflation
While the 2023 social security cost-of-living increase of 8.7% grabbed most of the headlines, the IRS also adjusted tax brackets and contribution limits for 2023 to keep pace with the 8.2% annual inflation rate reported in October. While many adjustments kept up (401k contribution limits increased 9.8%, IRA limits by 8.3%), the Feds were stingier with others (tax bracket thresholds increased only 7.1%, the standard family deduction by 6.9%, Roth income limit by 6.9%).
While the 2023 social security cost-of-living increase of 8.7% grabbed most of the headlines, the IRS also adjusted tax brackets and contribution limits for 2023 to keep pace with the 8.2% annual inflation rate reported in October. While many adjustments kept up (401k contribution limits increased 9.8%, IRA limits by 8.3%), the Feds were stingier with others (tax bracket thresholds increased only 7.1%, the standard family deduction by 6.9%, Roth income limit by 6.9%). I’ve summarized the major updates for 2023 below.
If you have any questions about how these changes may impact your saving or financial plan in the coming year feel free to reach out to me at ryan@ffadvisor.com or 616.594.6205.
Retirement Account Updates
401k contribution limit increased by $2,000 from $20,500 to $22,500
IRA contribution limit increased from $6,000 to $6,500
401k catch-up contributions increased from $6,500 to $7,500
IRA catch up contributions did not increase, they are still $1,000
SIMPLE retirement account contribution limit increased from $14,000 to $15,500
Roth IRA income limit phase-out increased:
Between $138,000 and $153,000 for singles and heads of household
Between $218,000 and $228,000 for married filing jointly
SEP IRA contribution limit increased from $61,000 to $66,000
HSA contribution limit increased from $3,650 to $3,850 for singles. Family coverage increased from $7,300 to $7,750.
Tax Updates
Standard Deduction for 2023: Married filing jointly $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900.
Tax Bracket Adjustments for 2023:
35% for incomes over $231,250 ($462,500 for married couples filing jointly);
32% for incomes over $182,100 ($364,200 for married couples filing jointly);
24% for incomes over $95,375 ($190,750 for married couples filing jointly);
22% for incomes over $44,725 ($89,450 for married couples filing jointly);
12% for incomes over $11,000 ($22,000 for married couples filing jointly).
For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.
Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022.
Social Security Updates
COLA Increase for 2023 will be 8.7%
Earnings limit for social security benefit adjustment for workers younger than full retirement age: $21,240
Fiduciary Financial is not a tax advisor, these figures are provided for informational purposes only.
THE STEWARDSHIP PODCAST // Stewarding Your Money with Leanne Rahn and Connor McDowell
Stewarding Your Money with Leanne Rahn and Connor McDowell
Episode Description
On this episode I am joined by my friends, colleagues, and fellow financial advisors Leanne Rahn and Connor McDowell. We tackle all things stewarding your money. Don't forget to join the SP community on Facebook.
What Should I Do With A Large Lump Sum Of Money
Did you just win the lottery, receive a large inheritance, or win a lawsuit settlement? If you just won the lottery I would recommend being wise with that money since 70% of lotto winners lose or spend all their money in five years or less (Source: Reader’s Digest; link below). Being smart with an inheritance or lawsuit settlement is just as important. Here are some steps you may want to consider when deciding what to do with your newfound wealth.
Don’t Do Anything
You might want to buy a fancy new car, go on an expensive vacation, or be generous by sharing the money with friends and family. There will be plenty of time for those things, but you should take a month to let everything settle first. Carefully consider who you are going to tell about the money. Don’t quit your job. Don’t go around bragging or posting about it on social media. Don’t put all of it into the hot stock of the month based on a Reddit forum. Continue living your life as if you never received the money. You will make better decisions once your endorphin levels have settled back to baseline.
Contact a Certified Public Accountant (CPA)
The IRS loves when people receive large sums of money, and you can bet that they want a piece of the pie. Often, that piece ends up being much larger than you’d prefer, so finding a CPA that specializes in taxes should be a top priority. They could help you strategize a plan to reduce the tax burden and leave more money available for other things.
Contact an Attorney
An attorney is able to explain the benefits of having a will, a trust, and a DPOA for finances & healthcare. They should be able to help you complete these if needed for your particular situation. If you already have these in place, this might be a great time to review and update any if needed. Having these in place will save your family many headaches when you eventually pass away.
Contact a Financial Advisor
A financial advisor is able to help create a written plan for your money. This could include paying off high-interest debt, opening and/or maxing out retirement accounts, funding a brokerage account, evaluating the need for term life insurance, building out a net worth statement, starting a donor-advised fund, and determining your risk tolerance to create your ideal asset allocation. When searching for a financial advisor you want to make sure they:
Are a Fiduciary: Which means they have to put your best interests first!
Are a Fee-Only Advisor: This means they do not have a conflict of interest with potentially selling you certain investments to get a large commission.
Have a Clear Investment Strategy: Do they have an investment strategy that can be clearly explained to you and matches your investment philosophy?
I am proud to say that I check all 3 of these boxes in my financial advising practice.
Implement Your Plan
While creating your financial plan might sound like the hardest part, implementing your plan may be more difficult. A written financial plan of how you want to direct your money is great but if you don’t take steps to implement that plan then it was all for nothing. When implementing your plan keep in mind:
Not to let emotions control your financial decisions.
Don’t let the news media tempt you into making quick, spur-of-the-moment decisions during periods of market volatility (Remember the main goal of news media is to attract viewers, not to give solid financial advice).
Stay consistent and reach out for help if needed. Investing is a marathon, not a sprint.
A patient going for physical therapy could perform all their therapy on their own if they knew the correct exercises. Having a physical therapist guide which exercises will be the most effective and support/encourage the patient in completing them, could help the outcome tremendously. Partnering with an excellent financial advisor is similar.
Finally, Treat Yo Self!
If you have made it to this point and are implementing a well-thought-out financial plan, you should congratulate yourself. You did the hard work and made the tough decisions to set yourself up for success. Now might be the time for you to use a small portion of that money to Treat Yo Self as a reward!
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
