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Just Common Cents

Offering my two cents on all things financal.

Educate Me: 529 Plans

There is no doubt college is an expensive endeavor. In fact, approximately 70% college students have student loan debt. If possible, one of the best ways to avoid college debt is to save up for it, and there are many ways to do this. One of the best (and maybe commonly overlooked) options is saving within a 529 Plan.

A 529 Plan? That sounds complicated and fancy. Trust me here, it’s not. A 529 Plan is just a place where you put the money you are saving for college. But Caleb, can’t I just put that money in my bank account? Well sure you can, but if you like FREE MONEY I’d put it in the 529 Plan. Yes, I said FREE MONEY.

529 Plans are set up by each state, as a way to encourage folks to save for college. Each state works basically the same. As an example, the state of Missouri has a 529 Plan that I signed up for because we wanted to save money for my wife to go back to college. We signed up online, an easy process, and then started contributing money to the plan at our leisure. $100 one month, $300 the next, etc. The amounts contributed to the Plan were invested in a fund of our choosing. Since I wasn’t feeling risky, we chose to put the money in a conservative interest fund, which earned us a few bucks here and there. Once we started receiving the college tuition bills, we just withdrew money from the Plan to pay the bills. Simple as that!

Okay, Caleb. This is all nice and good, but earlier you said FREE MONEY. Where is the free money? Fine, fine. I’ll get to the free money.

There are actually two ways to get free money:

  1. 33 of the 50 states offer tax credits/deductions for money contributed to a 529 Plan. These can be HUGE. For example, in Missouri, you can get FREE MONEY of approximately 6% of your total contributions to the Plan for the year. So, if you contributed $4,000 to the Plan for the year, you would receive approximately $240 of free money.
  2. The earnings that the Plan generates are tax-free for both federal and state taxes! So, for the conservative income fund mentioned above, any proceeds earned from the fund are tax-free. Never taxed by the government. Sounds good to me!

There are a few other nice things about 529 Plans.

  • There are no fees to set up the Plan.
  • Even if the college isn’t in your state, you can still use the money.
  • Anyone can set up a Plan for someone else. Say jolly ole’ grandma wants to help with her grandkids education. She can setup an account in their name, and still reap all the benefits described above. You can even set one up for yourself!
  • You can choose what “fund” you want to put the Plan money in. Feeling risky, try a risker option. Just want a few bucks here and there, try a conservative option.
  • You can withdraw money from the Plan at anytime. Need the money in 20 years? Sure. Need the money next week? Fine as well.

Alright, now this sounds to good to be true. What’s the catch? Well, there really isn’t one. But there is one thing you need to watch out for. The money contributed to the Plan MUST be used for education expenses OR ELSE (you’ll face a penalty of 10%.) So really, you just need to make sure you don’t put more money into the Plan than you need for college. So just watch it closely. However, education expenses do include tuition, books, supplies, etc. so you can spend the money on any of these things. You can also transfer the money to anyone who has education expenses. So say your kids don’t use all the money, you can always transfer it to your grandkids later on!

All this being said, there are way more intricacies to the Plan than I can discuss here, so please check out your individual state’s Plan for more details. But don’t let these intricacies scare you off. It is really hard to find a downside to these Plans. So, if you or someone you know is saving for college, please please please have them look into a 529 Plan. After all, who doesn’t love FREE MONEY!

As always, I’d love to hear your thoughts, questions, and comments. Shoot me a message on the “Contact Me” page.

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3 Common Tax Myths

Whether you like it or not, it will soon be time to file your taxes. You know, that lovely time of year where you get to see how much of you money the government takes! As a quick bonus myth, filing your taxes ≠ paying your taxes. Most of your taxes have probably already been paid throughout the year. Filing your taxes is just calculating the total amount of taxes that you owe from the previous year.

Self-admittedly, I am by no means in expert in taxes. Often, when I tell people I am a CPA they immediately think I know everything about taxes. Truth is, when you major in Accounting, they typically separate you into two groups: Tax and Audit. I happen to fall on the audit side. That being said, when people ask me about taxes, I’ve found three common myths that people tend to believe. Let’s jump in, shall we?

  1. Myth: I hope I get a massive tax refund!

Okay, so you may HOPE you get a massive tax refund, but the truth is that a tax refund is actually a bad thing. Now you may be thinking, “What?!? Are you crazy? The government is giving me money. This is awesome!” However, the money the government is giving you is actually your money.  Let’s do a quick example:

  • In 2016, you had $5,000 taken from your paycheck for federal taxes.
  • In 2017, you calculate your taxes and realize you are only required to pay $4,000.
  • After filing your taxes, the government sends you a check for $1,000!

That $1,000 could have been yours to spend as you wished during 2016, but instead (out of the niceness of your heart, I’m sure) you decided to lend that $1,000 to the government interest-free for a year! If you find that you are getting a large refund each year, you’ll want to “increase the number of personal allowances” on your paycheck. If you do this, you’ll limit your refund, but find your monthly paycheck increase!

2. Myth: My spouse and I should file separate tax returns.

This one always boggles me. I’m not sure who is out there spreading this rumor, but stop. It’s like people who say Pluto is not a planet. Seriously folks. Stop. Anyway, you should (almost) never file separately from your spouse. Filing jointly offers a larger tax deduction, access to additional credits and deductions, and simplifies the filing process. Overall filing jointly results in LOWER taxes!

Now, the ONLY reasons (yes, I said ONLY reasons) you and your spouse should file separately is in the odd case that you have LARGE medical expenses during the year and you and your spouse make significantly different income amounts OR if you and your spouse both make more than $1,000,000. (If both you and your spouse make more than $1,000,000, feel free to contact me. I’m just a lowly blogger…) Any other reasons for filing separately, are not legit. Don’t listen to your friend. Feel free to tell them they are wrong. Gently, please.

3. I need to hire a CPA to do my taxes.

For the vast majority of American’s this is not true. No, I don’t recommend doing taxes yourself without any assistance, but there are plenty of affordable online programs to help you to file your taxes that will be much cheaper than any CPA will be. (If you make less than $64,000, there are even options to file for free!) Personally I use TurboTax, but most online filing programs will be made equal. Just stick to the big names that you’ve heard of before. The programs will walk you, slowly and simply, through everything you need to know to ensure you get the largest refund possible. There is no (legal) magic wand that a CPA can waive that will save you on your taxes.

Now, if you have large investments, multiple real estate properties, self-employment income, or any other complex matters, then I would recommend consulting with a CPA. But again, most of us don’t need it. So why spend the money?

As always, I’m open to any questions or comments you have!

 

 

The D Word

2017. A new year. A chance to reflect on the past and make goals for the future. Each year, close to half of American’s make New Year’s resolutions, and consistently a top 5 resolution is to spend less, and save more. Essentially, make better financial decisions.

My New Year’s resolution for you is to lose the D word. Forever. Drop it. Leave it. Don’t need it. Never liked it anyway. Maybe you’ve guessed it by now, but the D word is DEBT. Get out of debt. Over 80% of people are in debt. Now you may say, sure sure, but most of that is just mortgage debt. And yes, you would be right, but let me tell you this. A study done by the Pew Charitable Trusts in 2015, found that 69% of people view non-mortgage debt as essential. ESSENTIAL. No, no, no.

Let’s break this down a little. What is debt anyway? In layman’s terms, debt is using someone else’s money to buy something that you CANNOT afford.

  • Home loan: Couldn’t afford your home.
  • Car loan: Couldn’t afford your car.
  • Student loans: Couldn’t afford your education.
  • Credit card debt: Couldn’t afford XYZ.

Now at this point, I can feel you getting upset with me. But Caleb, my family needed a home and I needed an education. Yes, I understand, and there are some types of debt that I can live with, but still, let’s not lose the basic premise: DEBT is the result of buying something you could not afford.

Why do I dislike debt some much and why should you? One word. INTEREST. I like to think of interest payments as wasted money. Poof. Gone. Flushed down the toilet. Think about it. What are you getting from your interest payment? NOTHING.

Let’s run a quick example to illustrate. Say I buy a house for $200,000 with a down payment of 20%, and a 30 year fixed-rate mortgage at 4.37% (the current average rate.) Making my normal interest payments,  I will end up paying close to $130,000 in INTEREST ALONE for my home. Now, let’s play this back. The home is worth the $200,000 that it was priced at, but overall I ended up paying $330,000 ($200,000 + $130,000) for my home. This is the same as over-paying by 65% on the house. Say I went to the store and bought a bag of groceries, and then came back home and told my wife “Honey! I got a great deal! I bought this entire bag of groceries and paid 65% more than the groceries are worth!” I think you see my point. Any type of interest payment is lost money.

So, if anything, make it your goal to get out of debt as quickly as possible. Save yourself the interest payments. After all, who wants to spend money and get nothing in return?

Stay tuned to future posts for tips on how to save money and get out of debt!

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