Jump-Start Your Financial Plan with NAPFA
NAPFA financial planners take your questions about retirement, taxes, insurance, saving for college and more: THURSDAY, OCT. 18, 1PM-3PM ET.
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I am 38, married and has one kid. Total income per year is about 300k, and has a net worth shy of 2M. We put maximum into 401ks and non-deductible Traditional IRA, HAS accts, 529 acct. What are my options of reducing tax? I plan to retire around age 55. Please advise. Thanks! -
@Gordon: You should look at contributing your portion to the Roth side of the 401k if possible. If you own the company, get a 401k plan with an inservice distrubtion for the profit sharing portion. Then take the distribution to an IRA and convert it to a Roth. You can also convert your non-deductile IRAs to Roths each year. Use a Roth Segregation technique: www.marottaonmoney.com Roths are the best way to move money where it will never be taxed again.
Consider starting a business (if you don't already have one) and employing your child/children. Their earned income rate will be lower and they can pay for their own clothes etc. from their after tax dollars rather than your highly taxed dollars. Children can work in a family business at any age. The youngest the IRS lost in tax court was six years old. My children started working for me at age 10 and I started paying them at age 14. -
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@Gordon: Putting investments in the correct investment accounts can also generate significant savings. Fixed-income investments belong in traditional IRA accounts. Interest is taxed at ordinary income tax rates, but the entire value of an IRA account is taxed at ordinary income tax rates anyway upon withdrawal. Appreciating assets should be in taxable investment accounts where the growth will be at a 15% capital gains rate, which is likely much lower than your ordinary income tax rate. Additionally, any foreign tax paid on foreign stock investments is tax deductible in a taxable account. Finally, those investments with the greatest potential for growth belong in Roth accounts where no tax will ever be paid. This tax management alone may boost your after-tax returns by as much as 1% annually.
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@Gordon: Individual stocks offer more opportunities to realize capital losses or gift capital gains. This is useful primarily in larger portfolios. A portfolio of individual stocks collectively may mimic the return of an exchange-traded fund and still provide additional tax savings. For example, although the total return might be 10% for the year, one of the individual stocks has doubled and two others lost 50% of their value. By holding individual stocks instead of the fund, you are able to sell the two stocks that have a 50% negative return and take the loss on your taxes. Holding the stock that has doubled in value postpones paying capital gains.
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@mrskebe. Not only unusual statement but a fantastic one. You are right that our tax code favors certain financial events. For the past several years, you really haven't gotten much tax relief from your mortgage interest. That occurs more in the first half of the mortgage life. So, maybe a little more in taxes, but not much. Have a mortgage burning party and feel good about your financial decisions. -
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This might be a little off topic, but I have young kids and want them to start learning the value of money and why you need to have a level of respect for it. Lessons I was not taught as a kid. If I were taught them I might not have made some stupid decisions years ago. Anyway, one of the things I am thinking about doing is giving them an allowance. How young is too young and what tips can you give me to teach them right from wrong in dealing with money?
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Go Pats, the editor of our magazine, Janet Bodnar writes regularly about Kids and Money. And, as luck would have it, she just wrote an article about allowance: Don't Tie Allowance to Chores. Curious what Debbie and David might have to say about the subject.
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@Go Pats! Must be a Patriot fan? A good question, I struggled with that for my children even though I do this for a living. You want to make it age appropriate and fun. An allowance is a terrific idea, just make sure the have to earn it. This way you set up a mini real world situation. Teaching by example is key. If they see you buying lots of stuff you do not need, it will be hard to teach otherwise. We actually started allowance at age 5. They had small chores that the allowance was tied to. We never used allowance for discipline, ie "you do x,y, z, you won't get your allowance" Since most kids at age 5 don't drive you have a few years of helping them with their spending decisions and the joy of saving up for something they really want. Great start for them.
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@Go Pats!: We think there are three things your kids need to learn about: earning, spending, and investing.
And there are three ways of learning: watching, hearing, doing.
If you make a 3x3 gird, try to figure out what you can teach in each grid.
For example. we paid our children to work in our businesses and then they used the money to buy whatever they needed.
Their clothes were paid with their after tax dollars (which is less expensive than our after tax dollars!)
They had to decide when to spend money and learned incredible lessons.
Here is a great source of ideas: moneyasyougrow.org
And my daughter wrote a series of her life lessons learned at www.richdadrichdaughter.com -
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@KMM: We recommend starting with Life Planning to determine what the money is for. This is especially important for those who have their finances well in order and are wondering what else they should be doing.
I learned things about myself at 40 that I had never figured out and it changed much of what I do on a day to day basis. Here is an article to get started: www.marottaonmoney.com -
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I have about $19,000 left at a 9% rate to pay on my mortgage ... The term ends in 2018...is it worth trying to pay this off early? Or Is there a better option? i.e. a low interest loan to pay off mortgage and pay for maintenance costs. Refinance? What will be the tax results?
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@RichSands: I understand your question but I don't know the answer. Does this answer your question?
"If you are married and filing jointly and your adjusted gross income is less than $100,000, you can deduct up to $25,000 in rental loses. Your deduction for loses will gradually phase out between income of $100,000 t0 $150,000. There is the possibility however, that you can pass along loses to future years." -
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As a final note, There are many times where investors (especially those reading Kiplinger!) do not need a financial advisor. For those who do seek a financial advisors, here are several articles on questions you should ask:
7 Questions You Must Ask Your Financial Adviser www.kiplinger.com
4 Questions to Ask When Evaluating a Financial Planner www.kiplinger.com
Ten Questions to Ask a Financial Advisor www.marottaonmoney.com -
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Thank you to Kiplinger and the other NAPFA members for making this possible. It was very enjoyable.
David John Marotta, CFP®, AIF®, is President of Marotta Wealth Management, Inc. of Charlottesville providing fee-only financial planning and wealth management at www.emarotta.com and blogging at www.marottaonmoney.com. -
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In addition to these great chats with NAPFA planners, Kiplinger editors and writers also host live chats every Thursday on topics ranging from home buying to investing to social security and investing for income. Next week, we’ll be hosting a chat on how to invest simply: Kiplinger Live Chats.
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