By Ronn Yaish, MBA
# 14. Should I Contribute to a 529?
December 31 is the deadline to contribute to most state 529 accounts.
It’s a good idea to consider the benefits of saving money for college. Costs are skyrocketing. To use a New Jersey example, Rutgers State University tuition is $14,372 for the 2016-2017 academic year. According to Savingforcollege.com, within the next 10 years public college tuition like Rutgers will be over $36,000 a year. (Average private colleges today cost $33,480, so in 10 years…yikes!) Any saving opportunities for college will help to make a dent in this obligation.
Families may want to consider investing in a 529 college account. Put money in today. Allow it to grow federal-tax free and enjoy tax-free withdrawals. Unfortunately, those living in New Jersey will not benefit from a state tax deduction. (Those from New York and Connecticut can benefit from a state deduction.) The criteria is very flexible; grandparents, aunts, uncles and cousins may open a 529 and start saving for your child. Also, the funds can always be redirected to another beneficiary.
# 15. Gifting
We don’t really know what the future holds for estate taxes. In New Jersey, the estate tax is changing January 2017 from $675K to $2M and will be repealed altogether in 2018. (At this point there is still a federal estate tax.) New Jersey has both an estate and an inheritance tax and has five beneficiary classes, each with its own separate tax rate. The type of class between the family members can change the tax owed. For example, in a Class “A” family of spouse, child and parent, to avoid having to strategize, if Bubby, AKA Grandma wanted to “share the wealth” today and help her children and grandchildren, she can gift each person $14K this year (before Dec 31) without having to file with the IRS. In this area, it is always a good idea to get advice from a financial/tax/legal professional!
#16 Charity in 2016 and Donor-Advised Funds
For the individual or family that itemizes their deductions, a charitable donation may help reduce that taxable income. In order to take advantage of such a deduction, the non-profit/charity must qualify as a 501 (c) (3) organization. So although it may be altruistic and part of our Torah culture, the cash we give someone who isn’t considered a qualified charity may not be counted toward our tax deductions. (We’ll get the dividend in our personal mitzvah account, which carries a lot of weight.)
Charity doesn’t need to be cash. If there are gifts you never opened, consider donating them to organizations like the Jewish War Veterans or Salvation Army. Consult your accountant to make sure you followed all the requirements, such as getting a receipt. This type of giving can help get other members in your household involved in the collecting and sorting of items to donate. I like to take my kids with me and ask them for “help” carrying the items to the car and into the organization’s office. Besides the experiential educational experience, this also helps to clear the home of unneeded stuff.
Now, what if I have some money to give away but am not sure who to donate to right now? Maybe you wanted to do more research or maybe it’s a good time to benefit from a tax-deductible donation before December 31, but it may not be the right time for you to determine where those funds should go. This situation may warrant the consideration of a donor-advised fund. You make the donation of money or securities now and benefit from the deduction now. And then “later” you get to decide which qualified charity will benefit from your generosity. Fidelity, Schwab and Vanguard have donor-advised fund accounts as well as major charities and foundations. It’s like having your own family foundation without the expense of running a foundation.
#17. Converting an IRA to a Roth-IRA: Good Idea?
Maybe. It depends on your goals and income. The first question I am usually asked is why in the world anyone would want to pay the government more taxes than they need to. The rudimentary answer is that one will need to pay taxes on the money at some point anyway. The only real question is if it’s better to pay that tax today or sometime in the future. Let’s use the following example: Sam puts $10K into an IRA in 1987 and wants to take the money out when he reaches 60 in 2017. The money has grown to a little over $100K. Because Sam is in a 28 percent tax bracket, he will need to pay $28K. However, if Sam would have put the 10K into a Roth IRA he would have paid taxes in 1987 of $2.8K (assuming he was in a 28 percent tax bracket) on that money and then no tax when taking the money out 30 years later 2017. In this simplistic example, Sam could pay taxes of $28K in 2017 or $2.8K, leaving him with either $72.K or $97.2K in retirement.
The problem is that no one has a crystal ball to know what their future taxes will be when making this decision “today.” When determining whether a conversion makes sense, current tax liability is probably one of the biggest considerations. Essentially it’s a tug-of-war between current tax liability and the opportunity to have tax-free distributions…without being forced to make a required minimum distribution.
There are many reasons why I like the Roth IRA, but it may not be the right financial instrument for you. Take a look at YaishFinancial.com/MoneyMoves for a Roth conversion report.
#18. Save Your Surplus.
This is the time of year when some of us may experience getting a bonus, a salary raise or other holiday money. Whatever the “extra” you come across, I like to recommend that my clients ignore the money. Not that they shouldn’t take it, but they shouldn’t count on it or even count on spending it. Your lifestyle, spending and budget were doing just fine before this “gift” and they will probably do just fine without the immediate benefit. So put it away. Add money to retirement, Roth IRAs, pay down some credit card debt, add to the holiday savings account or to the emergency fund account we discussed in the past. In other words, pay yourself first and set the money aside without frivolously spending it away.
Ronn Yaish is wealth adviser and CEO of Yaish Financial Services, a New Jersey-based investment and wealth management firm. Ronn earned a master’s in education and an MBA in finance. He has been featured in Forbes, AOL Finance, Credit.com, GoBanking and US News and World Report. His goal is to educate and help clients “keep things simple” when managing their money.