Enrolling in a 529 plan is the first step toward conscious planning for your child’s college education, but don’t stop there. With college costs rising steadily — over 168 percent over the last 20 years, according to U.S. News — it’s important to maximize the value of your plan to ensure you reach your college savings goals.
First, it’s important to know the specifics of 529 plans. For instance, there are two different types of these state-sponsored plans available:
- Probably the most well-known, the college savings plan allows your money to be invested in a variety of ways, such as mutual funds and the like, and it will compound interest over time. The account will go up or down in value based on the performance of the investment options.
- A pre-paid tuition plan allows savers to purchase units on a credit-based system to put toward tuition and fees for campus living, excluding secondary expenses such as room and board. Because prepaid plans allow you to lock in current tuition prices, if budgeting is a priority, this plan might be the best fit. Just be sure to check which colleges and universities participate in the plan because not all do.
Because 529 plans compound tax-free over time, starting early gives you an advantage. The longer the money is in the account, the more time it has to grow.
Take Advantage of Automatic Contributions
Automatic contributions to 529 plans can commonly be withdrawn from a linked checking or savings account. This makes it easier to stay on track to reach your goal. If financial situations change, account holders can adjust this setting in their account and continue to make contributions when it’s practical.
Be Mindful of Rules and Fees
Like IRAs, you make yourself vulnerable to penalty fees if you withdraw earnings from a 529 plan too soon, like withdrawing funds before the beneficiary’s tuition bill is due, which could incur a 10% penalty fee. Likewise, withdrawing more than allotted for qualifying expenses that year will prompt a fee. Though non-qualifying expenses, like medical bills, will provoke a penalty fee, there are some exceptions to this rule, such as if the beneficiary receives a scholarship or another type of educational assistance.
Both prepaid and college savings plans typically include enrollment and administrative fees when you withdrawal funds, but college savings plans may also add an assessment management fee.
Cut the Middle Man—You
An effective way to use your 529 funds to ensure that you’re not taking out more than your expenses, and thereby causing a tax liability, is to have the plan pay the costs directly to the school with direct payment.
Know How Your State Operates
Individual states make their own rules for 529 plans, so in whichever state you set up your 529 plan, it’s important to understand that state’s benefits, drawbacks, rules, and fees. State income tax deductions will also vary by state.
Withdraw from the Correct Fund
If you have more than one 529 plan, be sure you’re not just randomly withdrawing from any of them, or simply withdrawing from the account with the highest balance. Gauge each plan’s growth potential to determine which one has the best investment growth rate, and tap into those savings to receive the best tax breaks.
Involve Extended Family
Relatives have the ability to contribute to or open a 529 plan to help alleviate the burden for parents and students, and the contributor is eligible to take a deduction as long as it’s offered by that state.
Knowing the ins and outs of a 529 plan can be complex, but the simplest way to maximize your plan is to start early, allowing the funds to accumulate over time.
“Set it and forget it” is a common approach when it comes to a workplace 401(k), yet it likely will play a substantial role in the financial security of your future. Consistently contributing to your 401(k), and learning how to manage it, will set you on the course to living golden in your retirement years. Below are some tips to help you make the most of your workplace 401(k).
Contribute to the Match
Employers often match contributions up to a certain point, which means you’re getting free money for participating in the program. You should contribute at least up to this point. Beyond this, a typical rule of thumb is to add about 15% to your 401(k) plan each year, including company contributions (i.e. if your company matches 3%, plan to contribute 12%).
Boost Your Investment Savvy
Expense Ratio? Risk Tolerance? Whether you’re going it alone or recruiting the help of a financial professional, you need to have a basic knowledge of investing. Before filing away the information sent to you by your plan, be sure to read through it and look up any terms you don’t understand.
Get Help with Account Management
Of course, having a basic understanding of investment terms will take you only so far. If your investment knowledge is shaky, it might be worth it to recruit the help of a professional. Some 401(k) plans even offer free advice from a professional, or they will provide model portfolios to follow.
Save with a Target Date Fund
The simplest approach to a 401(k) plan is to allocate savings to the target date fund with the date that corresponds to the year closest to the year you reach age 65. With this low maintenance approach, the fund automatically adjusts as you get closer to retirement.
Learn to Rebalance
If you’re not partaking in the target date fund, you will need to perform routine maintenance on your 401(k), which is what “rebalancing” means. Provided you have a mix of stocks and bonds, you will have to buy and sell assets as they move up or down in value. Generally, participants have the option to automatically rebalance through your plan’s website, typically with a quarterly or annual rebalancing.
Though you may be able to take a loan from your 401(k), they usually have to be paid back within five years, with interest. The risks of borrowing from your 401(k) come when you lose your job or change employers, because the loan will be due almost immediately. If you can’t repay the loan, you’ll be taxed and burdened with a 10% penalty for early withdrawal. Not to mention, by taking out a loan on your 401(k), you are shortchanging your retirement savings in a way that could be extremely difficult to catch up.
Mix It Up
Your 401(k) should be only one prong in your retirement plan. Your home and other assets, funds from a side hustle, and other investment accounts like an IRA might be additional prongs that make a complete picture of your financial future. Spreading your assets over multiple income streams will yield better returns, so if you switch jobs at some point, consider whether rolling your 401(k) into your new employer’s plan makes the most sense for your situation, or if you should put those funds into an IRA, which may give your more investment options.
Spring cleaning isn’t just for closets, windows, and garages. After tax season is a great time to take a look at your personal finances and spending habits, and make adjustments where needed.
Organize Spending Habits
Take stock of your spending routines and target changes you want to make. Always treat yourself to a latte on Fridays? Meet friends for dinner on Saturdays? How about using coupons or promo codes before the expiration date for FOMTS (Fear Of Missing The Sale)? When you take a keen eye to your spending habits, you’ll be able to spot target areas where your spending reflects nothing more than routine. Now is the time to change up that routine to better reflect your financial goals moving forward.
Polish Your Budget
If you have no budget to dust off, now is the time to create one. Come up with a plan for how you want to save and spend your money, and track your spending habits to help reach your financial goals. The key is to be consistent and stay on budget. Make sure you’re polishing—er, updating—your budget monthly or even weekly.
Catch Up on Late Payments by Turning Trash into Dollars
Are you behind on any payments? Now is the perfect time to slow down and work on a plan to pay things off. Tried-and-true methods for getting some quick cash to help jumpstart this plan is to host a garage sale, post unwanted items on your local Facebook Marketplace, or sell on eBay. A spending freeze—a temporary pause on purchasing anything but essentials—can also help with with saving funds for paying off old bills.
Pare Down Debt
Staying in debt is like trying to swim against the current: you might be moving your arms and kicking your feet but you’re not moving forward. Now is the time to draft a debt repayment plan: make a list of all your debts and rank them in the order you want to pay them off (some people rank from lowest to highest amount owed, while others rank from highest to lowest interest rate). Whichever way you choose, build your plan into your budget, focus on one debt at a time, stay diligent, and watch your debt diminish each month.
Clean out clutter
In most cases you only need to hold onto your tax returns documents for three years, but the IRS has up to six years to initiate an audit if you’ve neglected to report at least 25% of your income. For this reason, taxpayers who receive multiple 1099s from a variety of income sources might want to hold onto documents for at least six years as it can be easy to miss or overlook reporting some income. Keep documents for seven years if you filed a claim for worthless securities or a bad debt deduction.
Maintenance Cleaning: Plan for your Future
Now is the time to plan for your financial future by creating or updating a financial plan with clear goals set on a timeline. A certified CPA or financial planner can help you identify areas of improvement and keep you on track to meet your financial goals.
March Madness is upon us, and while that term often refers to college basketball, if you’re like the majority of Americans, it can also apply to tax season. The IRS tax deadline will be here before we know it, and while it might be late in the game to do much about lowering your tax bill or increasing your return, here are a few tips to help make your 2019 tax return as smooth, painless, and advantageous as possible.
Max out your traditional IRA
This is the easiest way to lower your tax bill after the end of the calendar year, and you can make contributions for the 2018 tax year until the April 15 tax deadline. Contributions top out at $5,500, or $6,500 for those 55 years and older, and it’s all deductible on your 2018 tax return. Contact me to see if this strategy will work for you.
Beware of common mistakes
It seems obvious, but common blunders include social security numbers with mixed-up digits, missing signatures, and bad bank account numbers. These mistakes could cost you, literally, so double and triple check your personal information.
To itemize or not to itemize?
Due to the Tax Cuts and Jobs Act, which nearly doubled the standard deduction, itemizing deductions is now obsolete for millions of taxpayers. Unless your financial situation has changed drastically, if you didn’t itemize in the past, you won’t need to do it now. The standard deduction for 2018 is $24,000, so unless your itemizable deductions top that number, itemizing isn’t worth it.
Contribute to your HSA
HSA funds can essentially act as an addendum to your retirement savings because funds can be invested and carried over year after year.
Can’t pay? File anyway
If you owe the IRS money, your unpaid balance will result in a penalty of 0.5% of the unpaid balance per month or partial month. However, failure to file will cost you a lot more: a monthly penalty of 5% of the amount owed. So even if you can’t pay, file your return or request an extension. Read on to find out what to do when you can’t pay the full balance.
Set up an installment plan
The IRS might not have the best reputation, but the agency will work with taxpayers who show that they’re trying to pay their taxes. An installment plan allows you to make monthly payments up to 72 months until the balance is paid in full. This requires a setup fee, but it’s less if you arrange for direct debit from your bank account, and interest on your unpaid balance will still apply.
Request more time if necessary
You can file for an extension before April 15 with Form 4868 for automatic approval, which will give you until October 15 to file your tax return. Keep in mind this extension is just for filing and doesn’t include an extension for payment on taxes owed. If you don’t pay by April 15, your bill will be subject to interest and penalties. However, you can request a 120-day grace period from the IRS to come up with the payment, but you’ll still owe interest and other fees on the balance until it’s paid off.
The House recently passed the Retirement, Savings, and Other Tax Relief Act of 2018, which includes the Taxpayers First Act of 2018: legislation created to protect taxpayers from unfair practices as well as improve IRS operations. If the Bill makes it through the Senate, we’ll be seeing a more modernized and simplified IRS.
The bill directs the IRS commissioner to submit a plan for improved customer service within a year and a full plan to completely restructure the agency by September of 2020. The focus of this revamp will include, but not be limited to, the following:
The goal is to enhance customer service by adopting the private sector best practices of customer-service providers, which would mean updating guidance and training materials for IRS customer-service employees as well as developing means for quantitatively measuring the progress of customer service strategy. This would include providing taxpayers with more secure and varied means of communication, such as online and telephone call back services.
The IRS would initiate a collaborative effort with the private sector to improve cybersecurity and protect taxpayers from identity theft refund fraud. Along with implementing an information sharing and analysis center, the initiative would include appointing an IRS Chief Information Officer.
The plan would broaden electronic service assistance, such as creating individualized online accounts and portals for taxpayers to access taxpayer information, make payments of taxes, and share documentation. This includes adding the ability for taxpayers to prepare and file Forms 1099.
One of the IRS’s most forceful capabilities is property seizure. The new bill would still allow the IRS to pursue the seizure or forfeiture of assets, but only if a) either the property to be seized was derived from an illegal source, or b) the transactions were structured for the purpose of concealing a violation of a criminal law. It also includes new post-seizure procedures to protect taxpayers who had property taken by the IRS for violating the reporting rules. And should a court return funds to a taxpayer whose assets were mistakenly seized, the new bill provides taxpayer exemption for interest liability.
Other areas of improvement covered in the Bill include an independent appeals process for all taxpayers with a legitimate claim, easier access to equitable relief for innocent spouses on a deceptive joint return, and greater restriction on the IRS to issue a John Doe summons for suspected tax code violation.