Gabe Fransen | August 23, 2024
Our Financial Advisers at Strategic Financial Group give advice to clients every day. In this article we’ll look into five frequently asked questions and give our answers.
- Is it worth paying a Financial Adviser?
Answer: It depends. Not everyone needs a Financial Adviser, this comes from someone who is a Financial Adviser, so let me explain. If you are someone that enjoys personal finance and it is something that is not overwhelming, you might be in a position where you don’t need to hire a Financial Adviser. What we often see is that most folks are pretty good at having a general understanding of one or two areas of personal finance. Unfortunately, folks don’t know what they don’t know, which is where some need the most help. It’s not just about the investment portfolio, cash flow from income and expenses, but you also have the tax planning, estate planning, all the components of risk management that come into play, etc. In some situations there are additional complexities in a personal financial plan that get overlooked outside of the one or two areas that most folks focus on. In some cases, one mistake could lead to a huge negative impact on a financial plan and the cost of paying a Financial Adviser to help navigate the intricacies of the financial plan may be worth it.
- When is it not a good idea to have a Roth IRA?
Answer: Before we answer that question, let’s break down what a Roth IRA is. A Roth IRA is an Individual Retirement Account, the Roth prefix means when you contribute to that account, you won’t be given a tax benefit in that given year, but you are going to get tax benefit in the future. The money that you put in the Roth IRA grows tax free and when you take distributions in retirement, it comes out tax free. It is also not subject to Required Minimum Distributions. With tax free growth and tax free distributions, this is could be a valuable type of retirement account. This question brings into mind that we all should consider having an order of operations for our unique situation. What that means is that based on each individual situation, if there is a desired savings amount, what order of operations should I be saving that money in terms of the account types that I’m putting that money into. In many cases, we find that a reasonable order of operations for folks that are still working are as follows:
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- Company 401K – But only to the extent that the company is matching
- With the company match, we call that “free money” we recommend taking all the “free money” you can in working years
- HSA (Health Savings Account) – Triple Tax Savings
- Tax-Deductible Contributions
- Tax-Free Growth
- Tax-Free Withdrawals for Qualified Medical Expenses
- Roth IRA
- Individual/Joint Non-Qualified Account
- Company 401K – But only to the extent that the company is matching
With that Order of Operations, if the savings demand and savings capability are more than what can be achieved in the Company 401k match and the HSA max, in most cases a Roth IRA would be a good idea.
- How much of my income should be spent on housing?
Answer: Generally speaking, when we are looking at budgeting, which we call our spending plan, we want to look at the after tax amount that is available for the household. The reason for this is pretty simple, If you are working in a high tax state making $150,000 per year vs working in a state that has no income tax and making $150, 000 per year, even though your salary is the same, your after tax take home could be 10’s of thousands of dollars different just based on state taxes alone. With that being said, chase bank states (https://www.chase.com/personal/banking/education/budgeting-saving/how-much-income-should-go-to-rent) the rule of thumb that says you should only spend 30% of your income on housing. In this case, that 30% rule of thumb could be a good starting point for a budgeting activity, but you’d want to take the 30% from the after tax income amount. From a budgeting or spending plan perspective, this is just a starting point and the entire cost of the housing should be analyzed, understood and adjusted for inflation for long term planning
- Should I be using a 529 for our children’s future education expenses?
Answer: This is a common question as college expenses have been skyrocketing. A 529 is an education account that you can use for future educational expenses. The benefit of a 529 is that depending on the state that you are in, you might get a state tax deduction, the money grows tax free and comes out tax free if used for qualified educational expenses. There really isn’t a cut and dry answer for this question, just like many other personal financial questions it comes down to the specifics in each unique situation. The one big downside of a 529 is if you don’t use the money for qualified educational expenses and you take the money out, you could be subject to a 10% penalty. So one concern with a 529 is that if they are overfunded there may be a hefty penalty to pay to be able to utilize the funds that are remaining after all qualified educational expenses have been paid. This could happen in a case where a child decides not to go to college or they do go to college but get school paid for in a different way via scholarships or other funding. Some of the new tax law changes allow folks to take some of that overfunded money and move it to a Roth IRA for the child in the future, so that could potentially be a big benefit there. Another option for the overfunded account would be to change the beneficiary to a grandchild or another family member. But if we go back to the original goal of the 529, it was probably designated for a specific individual to use for educational expenses. It might be beneficial for a combination of a 529 and a taxable brokerage account designated for the child. This allows the child to have educational funds and gives the child and the parent the flexibility to have funds for something other than education for the child if that comes up. The downside of the brokerage account is that it does not have the tax benefit of the 529.
- We’ve been advised to buy an Indexed Universal Life Policy as a tax reduction retirement strategy – is that a good idea?
Answer: How an IUL generally works is that you put money into the policy, some of that money goes to the cost of Life Insurance and some of the cost goes to the investment vehicles that are inside of that, which are usually some sort of indexed based option, which means you have a floor to limit your downside, but you also have a cap that is going to limit your upside. Of course this is situation dependent again, but an Indexed Universal Insurance is meant for Insurance. We often see folks confuse “Insurance” with “Investment Vehicle” or they are talked into thinking “Insurance” is an “Investment Vehicle”. We believe that in some cases, folks are consumed by looking at the tax benefit that Insurance products offer, what is often overlooked is the cost associated with the Insurance products. Savings for retirement doesn’t always have to be in tax advantaged accounts, like 401K, IRA, Roth IRA, which are all great. We feel that an underutilized account type is simply a taxable brokerage account, either Individual or Joint. With this Individual or Joint account, you have the flexibility to take the money out whenever you want, you don’t have restrictions on it like tax advantaged retirement accounts. You won’t get the tax benefit up front or down the road, but it can still be a great way to save for retirement and keep your cost really low. We recommend asking the advisor who is recommending a Life Insurance Policy how much money they will be making on you getting into that policy. The reality is, we believe you should pay for good advice and service, it is just really important how much it will actually cost for getting into an insurance policy. We’ve seen insurance be oversold and the reason why this happens is because tax benefits sound really good, it is also often oversold because the people selling it are typically making a decent amount of money selling you that policy. We recommend making sure you are informed and educated before making that kind of purchase because the reality is that once you buy it, you really need to stick with that strategy for it to work long term.
Most personal financial questions are situational specific. In most cases there is a case for discussing your situation with a Financial Adviser, if nothing else, it could be very valuable to get a second opinion from a professional.
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