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Be Empowered: Why Women Should Learn About Finances

Be Empowered: Why Women Should Learn About Finances

Consider this scenario of a couple. Jane is a successful surgeon who makes good money. Her husband, John, comes from an affluent family and has considerable wealth to his name, but all of it is held in a trust. The couple, for many years, lives off Jane’s salary because it’s plenty to cover their living expenses. Life goes on, and this setup works well for the couple for some time.

But then Jane and John get divorced, at which time John makes a claim for alimony. The court views it as a valid claim because the couple has been living on Jane’s earnings all those years. To make matters worse, because of the way that John’s trust is titled, that portion of his wealth is essentially untouchable in the divorce proceedings. Jane is caught completely off guard. She is forced to wonder whether she will have enough wealth to support her vision for retirement while also supporting her children and parents.

 

Far too often, women find themselves in unfortunate financial situations like this, partly due to not having been more prepared or empowered to manage their personal wealth. These situations continue to arise even as women constitute a significant and growing economic force. A recent Boston Consulting Group study found that women control a third of the world’s wealth — about $70 trillion as of 2019 — and are amassing wealth at a faster clip than men, outpacing the growth of the overall global wealth market.1

 

While all women should expect to be solely responsible for their financial well-being at some point in their lifetimes, many women feel underprepared to manage their financial wellness for a variety of reasons.

 

Potential causes of financial under-empowerment

 

 

A key reason that many women may not feel fully engaged in managing their finances might be the origin of the relationships that a male/female couple has with their financial professionals.

 

 

When it comes to married women, relationships with the financial advisor, the attorney and the CPA are often initiated by the husband. Women are often outsiders to these already-formed relationships. This can cause women to feel that they aren’t the top priority, or worse yet, that they aren’t even part of the team.

 

 

Division of labor in the household is another potential issue. Although they often handle the day-to-day financial matters, most married women are not similarly involved in the larger, more macro, financial matters such as financial planning and investing. While division of labor is typical of any household, dividing up financial matters this way might jeopardize the couple’s — and more likely the woman’s — financial future.

 

 

Potential consequences of not being fully engaged

 

 

When women aren’t fully engaged in the larger financial discussions, they run the risk of being isolated from important information and decisions regarding their financial futures. The consequences can be significant, particularly when women find themselves “suddenly single.”

 

 

Life events such as a divorce and the sudden death of a spouse can lead to very difficult situations without the right preparation. For example, a widow may face liquidity or cash-flow challenges that can undermine her ability to maintain her current lifestyle, especially if wealth is tied up in private businesses, real estate or other illiquid assets. Family discord, losing out on a fair share of a business, and hefty legal and tax bills can exacerbate these issues.

 

 

Simply put, individuals — and especially women — can’t afford not to take control of their wealth and financial resources. Thankfully, there are several ways to address this.

 

 

Three steps toward greater financial empowerment

 

1. Establish and build the necessary relationships. It is critical that you know — and are known by — your financial professional and other professionals involved in managing your wealth. This may require a deliberate effort to build or even start a relationship with the financial professional. You can begin by joining the meetings and calls that, in the past, your spouse may have attended alone.

 

It may even make sense to set up individual time with your financial professional for a one-on-one conversation without your spouse present. This isn’t meant as a time for telling secrets or undercutting your spouse, but rather as a safe environment and opportunity to discuss things from your perspective, ask questions on your own terms and get to know your advisor.

 

 

2. Know the fundamentals and ask the right questions. Before you can feel fully engaged about upcoming decisions, you need to understand the fundamentals of your financial plan and investment strategy. This is important for everyone in a financial professional-client relationship, but especially for individuals who may be looking for a way to get up to speed.

 

Women often find themselves in situations where they need to take action to ensure that their financial rights are protected and their obligations and risks are limited appropriately. But they need to feel comfortable to ask questions.

 

Sometimes it is hard to know what questions to ask your financial professional. Start by asking to see an overview of your accounts. Ask the advisor to explain any terms that are unfamiliar to you. Go to the library or go online and take some time to learn the basics and research the right questions to ask.

 

 

3. Normalize the financial conversation. Many women may feel a stigma about discussing financial topics, and “money talk” is often viewed as a social taboo. Unfortunately, this may contribute to a woman’s hesitation to take initiative with financial matters. One way to overcome this stigma is by talking about these issues more regularly. Sharing your experiences with people you trust can help you feel more empowered and ready to engage — and your friends and family members will likely benefit from the conversation, too.

 

 

Women may underestimate the significant and growing economic force that they represent given the massive amount of wealth that will shift to women over the coming decades. Perhaps this is part of the reason that many women feel underprepared to manage their own finances, especially when thrust into more of a leadership role due to the death of a spouse or a divorce. But most women will end up in control of their own finances at some point in life. Now is the time to begin preparing for this role.

 

 

By focusing on building relationships, asking the right questions and normalizing the financial conversation, women can begin to take greater control of their financial futures.

 

 

1. Boston Consulting Group. From 2016 to 2019, women gained wealth at a compound annual growth rate (CAGR) of 6.1%, versus 4.1% for men and 4.7% for the overall wealth pool. From 2019 to 2023, women are expected to gain wealth at a CAGR of 7.2%, versus 5.2% for men and 5.8% for the overall wealth market. The global wealth market size is expected to reach $271 trillion by 2023.

Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Retirement Account Tax Changes for 2021

Retirement Account Tax Changes for 2021

Every year brings new tax rules and updates, so it’s important to take a quick look at retirement tax changes for 2021. Find out about possible tax increases. Manage your tax liability by using your retirement accounts and other tax deductions. 

Tax Changes for Standard Tax Deductions

 

The standard deductions increase slightly due to inflation adjustments, to $12,550 for single filers and $25,100 for married filing jointly. Thanks to the TCJA, you’re still limited to only $10,000 in state and local tax deductions.

While the tax rates remain the same as the previous year, the good news is that the income brackets have been adjusted slightly upward compared to 2020. The top rate of 37% applies to singles making over $523,600 and joint filers with incomes over $628,300. 

Capital gains tax income brackets have also been revised upwards, with 0% tax liability for singles making up to $40,400 and MFJ up to $80,800. The top rate of 20% is levied on singles with an income of $445,850 and joint filers earning at least $501,600.

Similarly, their hasn’t been much tax change to the retirement account and contribution landscape for 2021. Unfortunately, there were no inflation adjustments in contribution amounts to your employer retirement plan compared to last year. 

However, the income levels at which phasing out and eliminating deductible or Roth contributions to an IRA increased slightly for 2021. This increase is good news for anyone who may be interested in allocating funds to an IRA in addition to maximizing their employer plan.

 

Required Minimum Distributions Tax Changes (RMDs)

 

You don’t have to start taking RMDs from a qualified retirement account until the year you turn 72. As a reminder, you’ll have RMDs from your employer retirement plan, including Roth 401(k), but not from your Roth IRA.

You can still delay taking your first distribution until April 15 of the following year, but after that, you must take your RMDs by December 31 each year. If you delay your first year’s RMD, you’ll have two to satisfy the year you turn 73. For that reason, we usually don’t recommend it, but you may have a unique situation in which delaying your first RMD would benefit you tax-wise.

The government waived 2020 RMDs due to the coronavirus. Unless there’s a different announcement, the requirements are back in force for 2021, erasing those tax changes in 2020.

However, you can potentially avoid paying the income taxes on an IRA by using a Qualified Charitable Distribution. Withdrawals from your Traditional IRA up to $100,000 that are contributed to a qualified charity are tax-free. The funds must go directly to the organization without making a pit stop at your bank account along the way, and a QCD can’t be used on a 401(k) or employer plan.

 

IRA contributions and other tax changes

 

If your employer doesn’t offer a retirement plan, you can contribute up to $6,000 in either a Traditional or Roth IRA. There is an additional catch-up of $1,000 for those age 50 and older. While their may not be many tax changes, you can change your contributions if you are not maximizing those now.

If your employer does have a retirement plan, whether or not you choose to take part in it, your ability to make a deductible Traditional IRA contribution or Roth IRA contribution is capped at certain income limits. 

Remember, however, that you can always kick in nondeductible Traditional IRA funds up to the contribution limits. You’ll need to keep good records of what is deductible and what is not for determining the tax status of withdrawals later.

  • Deductible Traditional contributions
    • Begin to phase out at incomes of $66,000 if filing single/$105,000 for married filing jointly (for the person covered by an employer plan).
    • Not allowed at incomes over $76,000 single/$125,000 married filing jointly.
    • Begin to phase out at $198,000 for married filing jointly for the person who is not covered by an employer but whose spouse is) and not allowed above earnings of $208,000.
  • Roth IRA contributions
    • The maximum contribution is permitted for singles whose income is less than $125,000 and those married filing jointly with income less than $198,000.
    • Contributions decline as incomes rise and reach zero for singles making at least $140,000 and couples filing jointly above $208,000.
  • Married filing separate
    • Whether contributing to a Traditional IRA or a Roth, an income of over $10,000 prevents IRA contributions if employer plans cover you.

 

No tax changes on contributions to employer retirement plans (other than SEP/SIMPLE IRAs)

 

If you have a 401(k), 403(b), 457, or Thrift Savings Plan (TSP), your salary deferral contribution limit remains at $19,500. Workers over age 50 can also add a $6,500 catch-up for a total of $26,000.

However, some plans don’t limit you to just the salary deferral and employer match. The total annual 401(k) contribution limit is $58,000 for those under 50 and $64,500 over 50. Potentially, if your plan allows, you can then add after-tax money to your 401(k) plan on top of your match and salary deferral. If you’re unsure, ask HR or the third-party administrator (TPA) on the plan.

We explained in an earlier post how this works, but here’s a shorter version for illustrative purposes. Suppose you’re under age 50, so you set aside the maximum of $19,500. Your employer adds a $2,500 match, so you have contributed a total of $22,000. If the plan allows, potentially, you could add in another $36,000 after-tax, which would grow tax-deferred inside the 401(k). 

After-tax contributions into your employer plan can later be rolled into a Roth IRA, in what’s known as a Backdoor or Mega Roth. Investors who, because of their income, cannot contribute to a Roth IRA may find this technique valuable. So while there are not many tax changes, you can open new accounts or structure your retirement accounts to maximize you tax savings.

 

Health Savings Accounts (HSAs)

 

While these aren’t technically retirement accounts, you can use HSAs to bolster your nest egg. Unlike flex savings accounts or FSAs, they roll over from year to year. If you don’t use them for medical expenses, you can save them later, and the money grows tax-deferred.

These limits apply to the total contribution; that is, employer + employee, not employee alone. There’s also a slight difference in the $1,000 catch-up provision compared to what you find on retirement plans because the additional allowance is for workers age 55 and older.

  • Self only 
    • $3,600 contribution limit
    • $1,400 minimum deductible
    • $7,000 out-of-pocket maximum
  • Family plan 
    • $7,200 contribution limit
    • $2,800 minimum deductible
    • $14,000 maximum out-of-pocket

Want to talk about how to maximize your tax savings and what accounts you should set up to reduce your tax liability? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.

 

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Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Should I be worried about inflation?

Should I be worried about inflation?

Many investors want to know if there are good reasons now to be worried about inflation. Inflation, which is the trend of prices over time to rise, hasn’t reared its ugly head too much so far in the 21st century. In fact, during the coronavirus pandemic, some sectors experienced deflation instead.

However, some Americans still recall the 1970s, with runaway inflation but without a strong economy (stagflation). Inflation has been less of an issue since Congress added monitoring inflation as part of the Federal Reserve’s mission, in addition to “full” employment.
But as you know, past performance is no guarantee of future results!

 

Why some economists are worried about inflation

To help Americans return to work after the pandemic and keep small businesses afloat, the current administration passed a stimulus bill. Some, though not all, economists are worried that the effects of the stimulus, plus the expected higher performance of the economy in the near future, in addition to continued “loose” monetary policy designed to encourage demand, could cause prices to soar.

You might recall that inflation is often described as “too many dollars chasing too few goods.” The stimulus plus loose money provides more dollars. Yet it remains to be seen whether there will be too few goods.

Rising prices are one thing and not necessarily a problem in and of themselves. The issue is when paychecks don’t grow along with inflation. When consumer grocery bills are more expensive, but their wages have stayed the same, inflation creates a problem that’s both financial and political.

It may be worth noting that in inflation-adjusted terms, workers have about the same purchasing power on average as they did forty years ago, even though productivity has risen. What wage gains we’ve seen are mostly to employees in the top wage tier, according to Pew Research. If wages don’t match inflation, workers will be relatively poorer than they were in the 1970s.

In addition, bond yields have gone up recently, which is often a sign that investors expect inflation. This attitude is often a self-fulfilling prophecy: because investors are concerned about it, inflation starts to rise.

 

Inflation isn’t as simple as it may seem

You’re probably familiar with the term permabear, a person constantly prophesying stock market drops and economic recessions. Similarly, there’s a group of economists who frequently warn of impending inflation, who perhaps should be referred to as permainflators.

Inflation is commonly presumed to increase as employment increases, which is how it worked in the 20th century. However, the US hasn’t experienced inflation during the past few unemployment events, including the Great Recession and the coronavirus pandemic.

Although people generally understand what is meant by inflation, measuring it is a bit trickier. Most models use a “basket” of consumables and calculate the price changes on the basket on an ongoing basis.

One of the more well-known measures is the CPI or Consumer Price Index. It has some quirks, including out-of-pocket medical expenses, but no changes in what Medicare is charged (which would increase the bills for seniors on the plan).

Another issue lies with the quality measurement. When telephone providers began offering unlimited data services, CPI dropped due to the assumption that people would get more for their money. But very few people actually saw their phone bills decrease.

The Fed measures things differently by viewing what businesses are selling through the Personal Consumption Expenditure (PCE) index. This calculation captures behavior changes due to price shifts. For example, it will reflect more people buying oranges when apple prices go up. It also takes Medicare into account when looking at health care expenses.

Core inflation is the term used when food and energy are removed from the baskets. Their prices fluctuate with the weather, oil supply, and other factors that aren’t relevant to inflation.
It’s not at all clear why inflation has remained so low this century, even with fluctuations in employment that would typically increase and decrease it. Also, although inflation, in general, remains low, some sectors such as healthcare and housing have experienced significant increases. Before the pandemic, inflation in services was generally higher than inflation for goods.

 

If inflation has such adverse effects, why are people worried about its opposite, deflation?

Not all inflation is bad. As in medicine, it’s the dose that makes the poison. Note that the Fed’s target is 2% inflation, not zero.

Out-of-control inflation, when wages can’t keep up with rising prices, is problematic. Consumers can’t afford to consume, which means more firms go out of business, employing fewer workers.

On the other hand, a modest amount is an indicator of a good economy. It’s great for homeowners with fixed-rate mortgages, for example. Higher inflation brings with it higher interest rates, which also gives the Fed room to cut rates in a recession.

Decreasing prices may sound good at first, but they’re a signal of a weak economy. Deflation means that debts get more expensive, and that’s bad for nations with a lot of debt. It’s also bad for economies that have workers with a lot of debt too. The US doesn’t need deflation right now.

 

But what if we turn into Argentina? Or Venezuela? Or the US in the 1970s?

Argentina is a country with hyperinflation run amok. Restaurants write their menu prices on stickers to update as their supply of food becomes more expensive. There’s no point in saving in Argentinian pesos. Hyperinflation is a key driver for many Argentinians to enter the cryptocurrency market, to varying degrees of success. Other victims of runaway inflation include Venezuela today and the US fifty years ago.

Can it happen here, to the US in the 21st century? Technically, yes, it’s possible. However, it’s unlikely. The financial system has changed quite a bit since the 1970s. None of the three countries above had a strong central bank (the Fed) dedicated to managing inflation the way it does today, for one thing.

 

Long story short for worries about inflation?

There are both short-term and long-term dynamics in play right now. The pandemic is short-term, and no one knows what will happen when we slowly resume normal activities.

Treasury Secretary Janet Yellen, previously the Federal Reserve chair, has said that employees out of the workforce are a much more significant threat than inflation. That’s why she agrees with spending money on the stimulus.

If inflation starts heating up, today’s Fed has ways to cool it down. Including raising interest rates. Savers would be happy with higher rates since they’d earn more than they currently do.
We can’t say inflation is gone for good. Or that no one needs to worry about inflation at all. But at the same time, it’s unlikely that the US will suddenly be in an Argentina-like situation. Right now, focusing on getting people back to work after the pandemic is a higher priority.

Would you like to discuss how your portfolio will hedge against inflation in the long term? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.

    Speak to an Advisor

     

    Would you like to discuss how your portfolio will hedge against inflation in the long term? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.

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    Platt Wealth Management is a fee-only advisor helping clients acheive their financial goals. We offer customized financial advice, financial planning and investment management. If you would like to learn more about our services or get in touch for a consultation to review your current portfolio please give us a call. 619.255.9554. We provide stand alone scenario based financial plans for a flat fee, retainer based and assets based investment management or a combination of both for full wealth management services.

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    Should I Invest in Private Equity?

    Should I Invest in Private Equity?

    In recent years, the private equity sector has attracted a lot of attention, especially from high net worth investors asking, “Should I invest in private equity?” These investments are in private, non-publicly traded companies, so many investors in mutual funds and stocks don’t necessarily have access to this sector. Private equity firms you’ve probably heard of include The Blackstone Group and The Carlyle Group.

     

    Mechanics of investing in private equity

     

    Typically, private equity investors are investing for ownership in mature businesses. Ordinarily, they claim to invest to maximize the company’s value and then sell it at a profit. In this, they’re similar to venture capitalists (VCs). 

    However, unlike VCs, they usually purchase a majority ownership stake of 50% or more in the target company. Private equity firms own several businesses, known as portfolio companies, at the same time. It’s diversification in action, avoiding putting all their eggs in one company’s basket.

    The strategy for private equity firms is to raise money from limited partners (LPs) to form a private equity fund. Once the capital goal has been reached, the fund closes. It then invests in the portfolio companies they’ve targeted. The firm’s team begins the work of turning around the portfolio companies and bringing them to profitability. 

    The ideal candidate for private equity investment is a company that’s either stagnant or in some trouble but, with some capital and management oversight, has the potential for good growth. It does take time to turn troubled companies around, and the lifespan of a private equity fund is typically ten years. It’s not a fast cash strategy.

    When the fund successfully sells a portfolio company, profits are returned to the LPs after fees. On occasion, the company goes public instead.

     

    Who can invest in private equity?

     

    It’s been a somewhat exclusive club for a long time because many investments are only available to accredited investors. The SEC doesn’t regulate Private companies that don’t trade on a public exchange. 

    Therefore, accredited investors must have a net worth of at least $1 million and an income of $200,000 or more ($300,000 for married couples) over the past two years. These investors have to have more investing experience and therefore are up to doing their research and making decisions about private firms.

    The buy-in for traditional private equity is usually pretty significant as well. Though some funds allow a minimum contribution of $250,000, others require millions.

    There are some other ways to invest for those who don’t meet the accreditation minimums. Equity crowdfunding allows you to buy an ownership stake for as little as $2,000, depending on income. As a bonus, the SEC regulates these platforms.

    Or you can buy shares of private equity ETFs (exchange-traded funds). They’re publicly traded, like all ETFs, but invest in private companies.

     

    Types of private equity to invest in

     

    Often the deal is done via leveraged buyout or LBO. The purchase involves both equity and plenty of debt (hence the “leveraged”), which the company eventually must repay. Once the company regains and improves its profitability, the debt becomes less of a burden.

    Another type of private equity investing is “distressed funding,” which involves companies filed for Chapter 11 bankruptcy. Sometimes the goal of the fund is to restructure the firm and turn it around to sell at a profit. Other times it’s to strip the business for spare parts and gain on the assets, which is why some private equity firms have a bad reputation.

    Venture capital is a type of private equity investing. Unlike other private equity funds, however, VCs usually don’t buy an ownership stake. They go after promising new businesses to take to profitability and sell instead of mature ones.

    Finally, there are specialized LPs, which often invest in real estate. Most of their investments are in commercial or multifamily real estate. Specialized LPs may also take on infrastructure projects like bridges and roads.

     

    Advantages of private equity investing

     

     

    Potentially high reward

    Because these are private companies, the information publicly available is minimal. Good private equity funds have a substantial investment team that picks great candidates for turnaround. The potential profit from rescuing a portfolio of troubled businesses and turning them around is massive.

     

    Passive income

    As a limited partner, you’ll just be sitting back and letting the money flow. The fund’s investment team are the general partners (GPs) doing all the work.

     

    Disadvantages of private equity investing

     

    Illiquid assets

    Unlike public investments that trade on an exchange, you can’t just sell your stake in the fund any old time you feel like it. Investors are usually required to keep their money invested for a minimum of three to five years.

    That allows the GPs to work their magic, but it also means that money is not available to you if you need it.

     

    High fees

    Think mutual fund fees are high? If so, you might get blown away by the payment structure of private equity, which is similar to hedge funds. They’re allowed to charge an unlimited amount of fees because SEC doesn’t regulate them, unlike mutual fund managers.

    Performance bonuses are standard for the GPs in a private equity fund. The fee structure is usually the “2 and 20” approach. The annual fee is 2% AUM (assets under management) with a 20% performance bonus on the profits.

     

    Potentially high risk

    As you know, there’s no free lunch in investing! The high potential upside comes along with a high potential downside. Even a talented team isn’t guaranteed to turn every company around, and you could very quickly lose money in this investment.

     

    Reporting issues

    With publicly traded stocks on an exchange, it’s tough to fudge prices or performance. However, private equity firms typically use IRR (Internal Rate of Return) to demonstrate performance. However, that number isn’t realized until the business is sold. 

    Therefore, over the life of the fund, they’re reporting interim, estimated IRRs. They can pick and choose comparable businesses to generate a number that looks better than the ultimate return.

     

    Ways to invest intelligently in private equity

     

    Skip the funds and their high fees

    Investing directly into a firm allows you to avoid all the layers of the management structure. If you still prefer a more passive investment, use private equity ETFs.

     

    Commit capital to specific deals

    Instead of investing in one fund, you can agree to buy in deal-by-deal. This way, the management fees don’t start ticking until the money is invested. Not only that, you decide which deals you want to be a part of.

     

    Diversification across GPs

    Just as you diversify your stock investments in different companies and funds, do the same for your private equity investments. Research the fund managers and make sure you’re comfortable with their style.

     

    Are you interested in further diversifying your portfolio? Please feel free to give us a call at 619.255.9554 or email us to set up an appointment.

     

     

     

    Are you on track for retirement?

    Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

    Dream. Plan. Do.

    Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

    Kids Need to Understand Taxes

    Kids Need to Understand Taxes

    Raising children who understand the value of money gives them an advantage. So, that means your kids need to know about taxes. Of course, receiving a check at their first job for much less than the $15 per hour stated on the employment agreement is one way to find out. 

     

    Instead of believing that they’ve been robbed by their employer (or the government), by learning early on why taxes are deducted from their checks, they’ll understand that some of the taxes taken out pay for Social Security and Medicare when they’re no longer able to work. 

     

    They’ll also find out that federal and state taxes pay for things like the police and fire departments in the town where your family lives, as well as roads and bridges in addition to national defense and parks. Maybe even more important to many kids today, the fiber optic infrastructure that allows them to stay online all day!

     

    As a taxpayer, of course, you well know that taxes can be complicated. While you know that you don’t need to burden your five-year-old with the difference between marginal income tax rates and capital gains rates, you might not be sure what your kids need to know and when. 

     

    As always, you know your children best, and you might want to let them in on some of these topics earlier or later than suggested, depending on personalities and experience. The ranges are pretty broad, though. Take the opportunity to make sure they’re clear on the foundations before you start teaching them more advanced topics.

     

    Children ages 5-10 need to understand tax basics

    Even in elementary school, your kids can absorb some fundamental and easy lessons about taxes. It’s probably easiest to start while you’re shopping at the grocery or toy store. Find an item whose price is easy to understand, like $1 or $5 or $10. (Good luck in some of the stores, which for behavioral finance reasons, charge $4.99 or $9.99 instead! But that’s a lesson for later.) 

     

    Run the item(s) through checkout separately, so it’s clear on the receipt how much tax you paid. Point out that while the price was $5, the amount that came out of your pocket was slightly more than that. 

     

    They’ll want to know where the money goes. At this age, there’s no need to get very specific. Your kids only need a high-level overview; that money goes to the government to fund things like parks, police, and schools. No need to get political here either; just the basic facts will do.

     

    Middle school/junior high, ages 11-13 need to understand taxes in relation to their paycheck

    At this point, your kids will be familiar with sales taxes, having seen you shop. Maybe they’ve been able to shop themselves.

     

    They’re old enough to begin learning about other taxes, such as income tax, property tax, and Social Security/FICA. Show them your pay stub and discuss the various amounts that have been deducted and why. If you have Social Security statements, you can demonstrate where the money goes later on in life.

     

    Let them know what the deductions for Medicare and Social Security pay for. You can also explain the federal, state, and potentially local taxes. They should have a basic understanding of the US government from school and know that the federal government is in charge of some things, and state and local governments run others. Taxes at every level support all these different branches of government.

     

    Although you’ll explain the deductions from your paycheck to them in some detail, that’s not the central concept they need to know. The big lesson here is that the money they earned according to the stated pay rate is not what shows up in the paycheck. 

     

    Show them the difference between the stated rate and what gets deposited into your account. Of course, not all deductions will be taxes since you likely have health care and retirement contributions taken out as well. Talk to them about the importance of budgeting with the net amount after taxes and other deductions, not the gross income.

     

    Show them your property tax bill as well. Property owners fund local improvements and projects, so they need to understand where the money goes.

     

    Teens 14 and over need to understand how to file their taxes

    At this age, your kids are probably paying taxes in some shape or form already. They’re paying sales tax when they shop, and if they have jobs, they’ll also be paying income tax. They know the reality of paying taxes, especially if you’ve been educating them along the way.

     

    If they do have part-time (or other) jobs, show them how to keep their documents organized for tax time. Let your kids know about the importance of W-2s and why they need to keep track. They should do their income taxes (with your guidance, of course) during this time. 

     

    There are plenty of online software applications to use, which makes it easy. My dad made me do my taxes when I was in high school, and back then, we had to use paper forms and read the instructions. 

     

    Doing their taxes each year helps your children understand the basic calculations and the importance of tax deductions. They’ll also be in the habit of doing their taxes annually, so they won’t need to worry about IRS fines and fees later on.

     

    If they don’t have their own jobs, they can sit with you while you do your taxes online or go to the CPA with you. 

     

    When your kids start asking why so much money goes to taxes, discuss how Congress sets the rates. You can also show them that income tax rates change over time. For example, income tax rates on high earners are currently significantly lower than when the government built the interstate highway network across America and other big infrastructure projects in the middle of the last century.

     

    If they’ve been investing, or you’ve been investing on their behalf, introduce capital gains tax. Explain how they only pay it when investments are sold. Let them know about capital losses, which can reduce the amount of capital gains they’ll need to pay taxes on.

     

    Understanding income and capital gains taxes is an excellent segue into the importance of tax-deferred accounts. You know your children will need a significant amount of assets in the future and the need to start saving early to take advantage of compound returns. Show them what a difference not paying income and capital gains taxes on the money they accumulate in these accounts makes down the road.

     

    If you’ve been saving for their future in college 529 accounts, you have another chance to showcase the importance of deferred or tax-free (for qualified expenses) money. Depending on when you started funding the accounts, you can also demonstrate the power of compounding over time. 

     

    There are many opportunities to teach your kids about taxes in an age-appropriate way. It’s critical for them to understand the difference between gross and after-tax income to know how to budget appropriately. Tax season is an excellent time to demonstrate to your older kids why they need to understand IRS rules and regs.

     

    If you’d like to talk to us about investments for your kids, please feel free to give us a call at 619.255.9554 or email us to set up an appointment.

     

    Are you on track for retirement?

    Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

    Dream. Plan. Do.

    Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

    What’s in the American Rescue Plan?

    What’s in the American Rescue Plan?

     

    There’s a lot to unpack in the newly-passed, newly-signed American Rescue Plan bill. The goal is to help relieve the economic suffering caused by the COVID pandemic in various sectors. The bill makes unemployment benefits more generous, health insurance more affordable, and having children less expensive. It also reduces the pandemic’s most damaging effects on low-income homeowners and the homeless, people with student loans, state and local governments, and school systems.  

     

    Most of the press coverage has focused on the $1,400 checks. Not everybody is receiving them. Only single people with an adjusted gross income of $75,000 or below (households with $150,000 AGI or below) qualify for the full amount. The amount phases out entirely for people with incomes above $80,000 (households with AGIs above $160,000). The reporting period is the most recent year that people filed taxes; it could be 2019 or 2020.

     

    Unemployment and Cobra

     

    The American Rescue Plan also extends unemployment benefits (either through the Pandemic Unemployment Assistance program or the Pandemic Emergency Unemployment Compensation program) for an additional 25 weeks until September 6. It maintains the $300 per week supplemental benefit. It also makes the first $10,200 of those benefits tax-free for people who report less than $150,000 in income. The extra $300 federal supplement doesn’t count when calculating Medicaid eligibility and the Children’s Health Insurance Program.

     

    The healthcare provisions will be a lifesaver for some ex-employees. Under the government provisions in COBRA, people who lost their jobs can continue buying health insurance through their former employer. Still, they pay full-price rather than the subsidized price companies offer to their workers. The new relief bill would have the government pay the entire COBRA premium from April 1 through September 30.

     

    The bill will make health insurance much cheaper for those laid off than those who are still working. (This generous subsidy is not available for persons who left their job voluntarily.) Finally, the law imposes a cost cap on health insurance policies purchased through a government exchange. The premiums should not exceed 8.5% of a person’s adjusted gross income, which will benefit low-wage workers.

     

    How the American Rescue Plan helps families

     

    Families with children will receive additional benefits—but only families whose income qualifies them for the $1,400 checks. 

     

    The bill raises the child tax credit from $2,000 to $3,000 ($3,600 for children ages five and under), and it increases the age limit for qualifying children to 17, from 16 previously. These amounts could apply as a tax refund even for people whose tax bill is zero; that is, those who don’t have any reportable income to offset. 

     

    Families with incomes between $150,000 and $170,000 would receive the same $2,000 tax benefit as before, and that benefit phases out for married filers with incomes over $400,000 (singles above $200,000).

     

    A bigger set-aside for families with children is a monthly child allowance. The government will send a monthly check of $300 for each child under six years old and $250 for each child between the ages of six and 17.

    The American Rescue Plan sets aside $27 billion for financial assistance to people whose household income does not exceed 80% of the area’s median income to offset rent, utilities, and other housing expenses. 

    The Rescue Plan sets aside $10 billion to help homeowners struggling to make mortgage payments and $5 billion to help the homeless.

    Finally, if the Biden Administration decides to cancel student loan debt (which is not a given), the Act specifies that the borrowers wouldn’t have to pay any income taxes on the forgiven debt. 

    The American Rescue Plan pie chart

    You can see from the chart, with figures compiled by the nonpartisan Congressional Budget Office, that there is also money set aside to keep restaurants and bars afloat and money to help schools better control the risk of infection so they can reopen. $350 billion is going to state and local governments to prevent layoffs and allow them to continue providing essential services

    COVID Economic Projections (002)

    The administration passed the American Rescue Plan as a stimulus measure, but we can better characterize it as disaster relief. A graph prepared by the Congressional Budget Office (shown here) clarifies that the U.S. economy was on a path to never quite recover from the COVID recession before this legislation passed. 

    With the American Rescue Plan in place, the best estimate is that the economy might fully recover as early as the 4th quarter of this year.

     

     

    Are you on track for retirement?

    Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

    Dream. Plan. Do.

    Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

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