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Financial Literacy

7 Budgeting Tips For July

By | Financial Literacy, Financial Planning
Budgeting can help you achieve your goals faster.

Once you realize that budgeting can help you achieve the goals you’ve set out for yourself, you may find the process inspiring.

  1. Think of your budget as a spending plan

Think of your budget as your “how-to” plan for spending your money rather than what you “can’t” spend. The upside is that by budgeting for short- and long-term expenditures, you can spend money without feeling guilty about it, because you’ve actually planned to spend it!

With a budget, you will simply be allocating all your expenditures with a means to an end, whether it’s getting out of debt, keeping your food bill down, having some fun in life, or saving for retirement. You may even discover that you have more money than you thought. Once you become intentional about what you’re spending, you may realize that your gym membership or all those monthly subscriptions you’re not using won’t be missed and you’ll have more cash free for other purposes, like the occasional Starbucks run or other little treat that makes you happy.

  1. Try using a zero-sum approach

A zero-sum budget means that every penny you have coming in each month gets allocated to a category. The goal is that your monthly income minus your allocations equals zero, so that you’ve put every dollar you have to use.

Start your zero-sum budget by figuring out your monthly net take-home pay or income amount, then allocate all of it to either savings, investments, bills, expenses or debt payoff. This forces you to be accountable for every penny, which puts you in control.

  1. Start with the most important categories first

Start with your true necessities, like mortgage, utilities, food and transportation. Make sure savings is a top priority. Then you can fill in the other categories that are discretionary.

  1. Strive to save 20-30% of your net for short- and long-term goals, and limit housing costs to 30%

So how does this break out? If your net income is $4,000 per month, you should strive to save $800 – $1,200 per month towards short- and long-term goals* and limit your mortgage or rent to $1,200 per month or less.

*Your short-term goals might include a vacation, wedding or down payment for a home. Long-term goals might be accumulating an emergency fund that equals six months’ expenses, getting out of debt, or saving for college or retirement.

  1. Label savings

Rather than have a lump savings account that includes everything you are saving for, try to use separate accounts or find a way to label them using a software program. That way you can see at a glance how close you are getting to each individual goal, like your vacation fund, emergency fund, etc.

Labeled savings accounts can help you keep track of progress toward your goals separately and feel a sense of accomplishment as you achieve each one.

  1. Remember each month’s varying expenses

Your spouse’s birthday, your birthday, holidays, back-to-school, annual car or home maintenance, Christmas each December—don’t forget to include varying annual expenses in each month’s budget. Not having money allocated for special occasions or annual expenses can take the joy out of life, while planning for them can do the opposite.

  1. Create a buffer, and use cash for problem areas

Create a buffer of cash that’s available; think of it as a little temporary augment to your emergency fund until you’ve been budgeting for a year or more. That way if something you forgot comes up, you’ll have the money for it—and you can put it in the regular budget for next time.

If you run into problem areas—for example, maybe you always grab extra unplanned items at the grocery store—consider using cash for problem categories rather than a credit card. Envelopes with cash can hold you more accountable because when the cash runs out, you have to stop spending.

 

If you’d like to discuss this or any other financial matter, please call us. We’re here to help. You can reach Bulwark Capital Management at 253.509.0395. 

It’s Annuity Awareness Month. How much do you know about annuities?

By | Financial Literacy, Retirement

Because June is Annuity Awareness Month, here is an overview about them.

Annuity product designs and types continue to evolve, primarily to meet the demands of people nearing retirement. In addition to their original purpose of providing retirement income, insurance companies have developed hybrid policies, adding features to address the multiple risks consumers face as they get older.

The most important thing you should know about annuities is that they are insurance policies, or contracts between you and an insurance company. Guarantees in them are backed by the financial strength and claims-paying ability of the issuing insurance company.

As with any contract, it’s important to read and understand the fine print before you sign, and you should compare policies from multiple insurance companies to find the best value. That’s where a good independent financial advisor can help.

Fixed Annuities

Fixed annuities are probably the easiest type of annuity to understand. (They are also the oldest—a simple form of the fixed annuity was originally created for Roman soldiers who grew too old to serve.) An insurance company will guarantee* a fixed interest rate on your fixed annuity contract for a selected term, usually from one to 15 years. You can usually purchase a fixed annuity with either a lump sum of money or a series of payments over time.

At the end of the contract term, you can take the money out, put it into another investment, or “annuitize,” meaning you can begin to take periodic payments over time to create income for retirement. This is called the “payout phase” of an annuity contract and it may last for a specified number of months, years, or be guaranteed* for as long as you live.

If you do choose to annuitize a fixed annuity policy, you can begin to receive periodic payments at once (called an immediate fixed) or you can wait until a certain age or time in the future to start receiving payments (called a deferred fixed).

If you purchase one of these annuities with non-qualified money (meaning you have already paid taxes on it), the interest in the annuity policy accrues on a tax-deferred basis. At the point where you take the money out of the annuity or begin taking periodic annuity payments, distributions are taxed based on an “exclusion ratio” so that you only pay taxes on the interest or gains.

If you purchase one of these annuities with qualified money, such as by rolling it over from a traditional 401(k) or IRA, distributions are 100% taxable, since you have not paid any taxes on any of the money yet. As with any qualified plan, if you take or withdraw money before age 59-1/2 you may owe additional tax penalties.

Variable Annuities

Variable annuities were developed in the 1950s. The best way to explain variable annuities is to compare them to fixed annuities. First of all, most variable annuities require a prospectus since part of your money will actually be invested in the stock market, called “sub-account investments.” That means that there is market risk involved with variable annuities, because you can either make money on the amount invested in sub-accounts, or you can lose it depending on market performance.

Variable annuities are usually purchased with the expectation that at some point the contract owner will annuitize or begin taking periodic payments. These are called deferred variable annuity contracts. (You can also purchase an immediate variable annuity contract.)

The important thing to understand about the variable annuity contract is that your periodic annuity payments may fluctuate based on stock market performance, depending on policy terms. And it’s possible that some variable annuity policies can lose principal due to stock market losses.

Variable annuities often come with a death benefit for your beneficiaries based on the contract terms, but some specify that there must be enough money left in the policy after annuitization payments have been taken out and/or will pay the death benefit as long as the sub-accounts have not lost too much money.

Fixed Indexed Annuities

Fixed indexed annuities were first designed in 1995. The biggest difference between them and variable annuities is that fixed indexed annuities are not actually invested in the stock market so they are not subject to market risk. With fixed indexed annuities, after you have owned the policy for a specified number of years your principal is guaranteed*.

With fixed indexed annuities, any policy gains are credited and then locked in annually, bi-annually or at specified points in time. The gains credited to the policy are determined by the insurance company based on the performance of a selected index (for instance, the S&P 500) or multiple indexes. Some fixed indexed annuity gains are capped relative to index performance, meaning you can only be credited a certain percentage, but some are uncapped.

Index performance is used as a benchmark for policy gains or periodic crediting and lock-in. With fixed indexed annuities, you have the potential to participate in market gains. And if the benchmark index loses money, your policy is credited with 0%, keeping the most current locked-in principal value in place.

Fixed indexed annuities can be purchased on an immediate or deferred basis. They can be purchased with qualified or non-qualified money. And they can offer a lifetime income option and/or a death benefit.

Other Things to Know About Annuities

*The guarantees provided by annuities rely on the claims-paying ability and financial strength of the issuing insurance company.

Annuities must be considered carefully based on your particular situation because they are not liquid. Almost all annuities are subject to early withdrawal penalties. Make sure you understand the contract terms and the type of annuity you are purchasing. Your financial advisor can help you compare and analyze policies.

This article is provided for information purposes only and is accurate to the best of our knowledge. This article is not to be relied on or considered as investment or tax advice.

Have questions about annuities? Please call us! You can reach Bulwark Capital Management at 253.509.0395. 

 

The Rules Are Changing For 401(k)s In 2020

By | Financial Literacy, Retirement

The Rules Are Changing For Your 401(k) In 2020

If you’re still working and contributing to a 401(k) or similar workplace retirement plan, there is some good news for the upcoming year.

If you’re under age 50, the amount you can contribute to your 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is now $19,500 for 2020—a $500 increase over 2019. Additionally, for those who are age 50 or over by December 31, 2020, the catch-up amount is now $6,500, up by $500 (and the first increase since 2015).

Keep in mind that you can still put away an additional $6,000 in an IRA—$7,000 for those age 50 or older. As always, these contributions can be made up until tax day, April 15, for the previous year’s taxes. That plus the new limits mean that an employee who is 50+ can sock away a total of $33,000 in tax-advantaged retirement accounts for 2020.

For Business Owners

For self-employed small business owners, the amount that can be saved in a SEP IRA or a solo 401(k) goes up from $56,000 to $57,000 in 2020, if all requirements are met. The limit on SIMPLE retirement accounts goes up from $13,000 to $13,500 in 2020 (plus $3,000 if you’re 50+). For defined benefit plans—similar to pensions of the past, but now used by high-earning self-employed individuals—the limit on the annual benefit goes up from $225,000 in 2019 to $230,000 in 2020.

Hardship Withdrawal Rule Changes

Even though making hardship withdrawals from 401(k) and 403(b) retirement plans will be easier for plan participants in 2020, for most employees, withdrawals should be a last-ditch option if you’re facing financial hardship. This is true especially if you’re under age 59-1/2, when you have to pay taxes plus a 10% tax penalty on the amount withdrawn.

However, it will be easier to start to saving again following a hardship withdrawal. Prior to 2020, employees who took a hardship withdrawal were barred from making new contributions to their plans for six months. Starting January 1st, this is no longer the case.

Also in 2020, employees can withdraw earnings, profit-sharing and stock bonuses rather than just their contribution amounts for 401(k) hardship withdrawals. (NOTE: 403(b) plan participants are still limited to just their contributions.)

Starting in 2020, your employer gets to decide whether you have to take a plan loan first—requiring payback with interest—before taking a hardship withdrawal; it’s no longer mandated by the government, it’s optional. Remember, taking a loan rather than a hardship withdrawal is almost always your best choice to keep your retirement on track.

Hardship Verification and Disaster Relief Rules

Hardship verification standards have been eased; an employer or retirement plan administrator is not required to determine if a hardship withdrawal is necessary by checking cash or assets available—the burden is on the employee to certify that it is.

To take a hardship withdrawal, employees must have an immediate and heavy financial burden or need that includes one or more of the following:

  1. Purchase of a primary residence.
  2. Expenses to repair damage or to make improvements to a primary residence.
  3. Preventing eviction or foreclosure from a primary residence.
  4. Post-secondary education expenses for the upcoming 12 months for participants, spouses and children.
  5. Funeral expenses.
  6. Medical expenses not covered by insurance.

In 2020, a seventh category has been added for expenses resulting from a federally declared disaster in an area designated by FEMA; the agency will no longer need to issue special disaster-relief announcements to permit hardship withdrawals to those affected.

 

If you have any questions about the new rules for 401(k)s and similar retirement savings plans, please call us! Our mission is to help you achieve your personal financial and retirement goals.

Call Bulwark Capital Management at 253.509.0395.

 

 

Sources:
https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/#662aa23733bb
https://www.shrm.org/resourcesandtools/tools-and-samples/exreq/pages/details.aspx?erid=1312
https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-final-rule-eases-401k-hardship-withdrawals.aspx

What’s the difference between an IRA and a Roth IRA?

By | Financial Literacy, Retirement

Common financial wisdom tells us that as a paid member of the American workforce, you should contribute the maximum to your 401(k), 403(b), 457(b) or similar retirement plan, especially if your organization matches a percentage of your contributions.

But not every company has one of these plans. As an individual taxpayer with earned income, you have other options available to you in order to save for retirement, including the IRA or “Individual Retirement Account.”

An IRA is a type of account which acts as a shell or holder. Within the IRA, you can invest in many different types of assets—you have far more choices than your company 401(k)’s short list of fund options. You can choose between CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available. You can open an IRA account at a bank, brokerage, mutual fund company, insurance company, or some may be opened directly online.

The question is, should you open your IRA as a traditional IRA or a Roth IRA? Your decision should be based on your income as well as your current and future tax situation, because both Roth IRAs and traditional IRAs are retirement savings and investment vehicles subject to different IRS rules.

Here’s a basic overview of how a Roth compares to a traditional IRA:

 

+ The biggest difference between Roth versus traditional IRA retirement accounts is that Roth IRA contributions are made with post-tax dollars, while traditional IRA contributions are typically made with pre-tax dollars. This gets accounted for on your tax return in the year you choose to make the contribution. You have until the April 15 tax deadline to open or contribute to either type of IRA.

+ When you begin taking money out of these two types of accounts for retirement, traditional IRA distributions are treated as ordinary income and taxed accordingly, while Roth IRA distributions are usually taken out tax-free, because you already paid income taxes on the money before you invested it.

Essentially, with a Roth IRA, your interest, dividends and capital gains which accumulate inside it are tax-free as long as you follow all Roth IRA withdrawal rules.

+ Roth IRAs have income restrictions that may disqualify higher-income people from participating; traditional IRAs do not.

For instance, in order to contribute to a Roth IRA for 2019, single tax filers must have a modified adjusted gross income (MAGA) of less than $137,000 (contributions are phased out starting at $122,000), while the MAGA limit for married filers is $203,000 (with contribution phase outs starting at $193,000).

+ The annual maximum contribution limits for both traditional IRAs and Roth IRAs are the same. For 2019, you can contribute up to $6,000, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year.

If married, you can contribute up to that amount for yourself in your own IRA, plus up to that amount in a separate IRA for your non-working or low-earning spouse subject to certain restrictions.

If you are eligible to contribute to both types of IRAs, you may divide your contributions between a Roth and traditional IRA. However, your total contribution to both IRAs must not exceed the total limit for that tax year (including the catch-up contribution if you’re age 50 or over).

+ With Roth IRAs, there is no age limit on contributions. With traditional IRA accounts, you can no longer contribute starting the year you reach age 70-1/2.

+ Roth IRA contributions have never been deductible on your taxes, but contributions to a traditional IRA may be deductible on federal and state tax returns, lowering your taxable income for the year, depending on your tax status and whether or not you or your spouse contributes to a plan through work such as a 401(k).

If you do participate in a plan at work like a 401(k), and if your income is less than $74,000 for an individual or $123,000 for joint filers, your traditional IRA may still be fully tax deductible for 2019.

NOTE: Even if you have a high income, a non-tax-deductible traditional IRA still may be opened for you or your spouse.

+ Both traditional IRA and Roth IRA contributions may make you eligible for a “saver’s tax credit” if your income is low enough. The 2019 AGI (adjusted gross income) limits for the saver’s credit are $32,000 for single filers and $64,000 for married couples filing jointly.

+ Roth IRA accounts are not subject to annual RMDs, or Required Minimum Distributions, which are required for traditional IRA accounts starting at age 70-1/2. The amounts withdrawn are subject to ordinary income tax based on your tax bracket for the year.

+ Roth IRA withdrawals:

When it comes to withdrawing money, you can withdraw your Roth IRA contributions at any time, at any age with no penalty as long as the account has been in place for five years, so your Roth IRA can double as your emergency fund.

However, if you withdraw Roth IRA earnings prior to reaching age 59-1/2, you may have to pay income taxes on them, with some exceptions, such as first-time homebuyer expenses up to $10,000. Qualified education and hardship withdrawals may also be available before the age limit and without the five-year waiting period, but you may have to pay tax on any amount that was attributed to earnings.

Remember, with a Roth IRA, there are no RMDs. If you don’t need the money, you’re not required to withdraw any money from your Roth IRA at all, and it can pass to your heirs with tax advantages, although beneficiaries will be subject to RMDs.

+ Traditional IRA withdrawals:

Traditional IRA withdrawals come with a 10% tax penalty before age 59-1/2, plus ordinary income taxes will be due on the amount withdrawn.

Certain exceptions to the tax penalty on early withdrawals may apply, you may withdraw up to $10,000 to pay for some hardships, health care, disability or higher education expenses, or to make a down payment on your first home. NOTE: Although there may not be a penalty, you will still have to pay income taxes on the withdrawal.

With traditional IRAs, RMDs start at age 70-1/2 whether you need the money or not, and you have to pay ordinary income tax on the amounts withdrawn each tax year. There is no grace period to April 15; you must withdraw the money each year by midnight on December 31 or pay a 50% penalty plus taxes owed.

Additionally, beneficiaries must pay taxes on inherited traditional IRA accounts.

+ You can convert a traditional IRA to a Roth IRA, but strict rules apply. And be careful, because you have to pay income taxes on the money converted, and recent tax law changes mean you can’t undo this later.

+ If you are a business owner or have self-employment income, you may be eligible to set up a Simplified Employee Pension or (SEP) IRA, or a SIMPLE IRA (Savings Incentive Match Plan for Employees), depending on your company’s structure. You can usually contribute a lot more money to these plans than you can to traditional IRA or Roth IRA accounts.

+ One final note. It is very important for you to understand that the beneficiaries you name on your 401(k), 403(b), 457(b), traditional IRA, Roth IRA and insurance policies take precedence over your estate documents. That’s why it’s critical to make sure that your beneficiaries are always kept up-to-date.

 

If you have any questions about this information, or want to review or update your current financial or retirement planning documents, we can help. Contact Bulwark Capital Management at 253.509.0395. Our headquarters are located in Silverdale, Washington.

 

This article is for informational purposes only and is not intended to provide any individual with tax or financial advice. We encourage you to consult with your tax professional, financial advisor or attorney to discuss your personal situation. It’s also important to keep in mind that Congress can change the rules regarding these accounts at any time. The regulations may be very different when you retire.

Sources:
“What Is an IRA and How Many Types Are There?” Thebalance.com. https://www.thebalance.com/what-is-an-ira-and-how-many-types-of-iras-are-there-2388700 (accessed May 8, 2019).
“Traditional IRA vs. Roth IRA,” RothIRA.com. https://www.rothira.com/traditional-ira-vs-roth-ira (accessed May 8, 2019).
“Roth IRA vs. Traditional IRA: What’s the Difference?” Investopedia.com. https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/ (accessed May 8, 2019).
“Saver’s Tax Credit Qualifications for 2018 & 2019,” 20somethingfinance.com.  https://20somethingfinance.com/savers-tax-credit/  (accessed May 9, 2019).