Author: Mike Hunsberger, ChFC®, CFP®, MQFP, CCFC

Categories
Financial Planning

Conducting a Home and Auto Insurance Review

Home and Auto Insurance Checklist

Conducting a Home and Auto Insurance Review

Many consumers are shocked when they receive their annual insurance bills.  Rates for auto and homeowners’ insurance are climbing significantly.  Auto rates increasing 20% isn’t uncommon and homeowners probably isn’t much less especially if you live in an area that see extreme weather events.

So why is this happening?

The biggest driver of this is the increase in prices of cars and homes and the costs to repair them.  It costs much more to repair newer cars.  I heard an example recently that said replacing a bumper used to cost a few hundred dollars.  Now with all the cameras and tech integrated into cars it’s several thousand dollars.  For home insurers, costs associated with extreme weather events have been increasing.  Couple that with rising home prices and the demand for housing and you’ve got a recipe for higher costs.

So why is this happening now?

Insurance is a regulated industry.  Each state insurance commissioner sets rates based on the requests from companies.  This means it operates on a lag.  During COVID, claims dropped because people weren’t driving as much.  The insurers made more money.  As the pandemic eased, claims increased to higher levels than pre-pandemic.  This lowered insurance company profitability.  They have now gotten the insurance commissioners to increase rates and as your individual policy comes up for renewal it’ll probably mean higher rates for you.

What can you do?

You could consider shopping for another company, but this is typically not an individual company thing.  Rates have increased nearly across the board.  It doesn’t mean you shouldn’t compare.  Just don’t expect huge savings.

Review Your Coverage

You can also review your coverages.  This is important to do at least every few years.  You can download the 2-page checklist (link), but here are a few things to consider.

Homeowners Insurance & Personal Property

Has your home increased in value? 

There are nuances in the insurance rules that require you policy to cover < 80% of the value.  If your policy doesn’t, you could only get partial reimbursement for any claims.

What’s your deductible?  Can you raise it?

I’m a big fan of higher deductibles.  They can reduce your premiums because you’ll be less likely to file a small claim.  If you’ve got a proper emergency fund, this is something you could assess to determine if it’s right for you.

Have you made big improvements to your home? 

If you’ve finished the basement, built an addition, or added a pool, you’ll want to make sure these improvements are fully captured in your policy.

Do you have personal property (jewelry, electronics, antiques) that has value beyond the standard policy limit?

If so you may need to add a specific policy provision to cover it.

Auto Policy

Are your collision and comprehensive limits adequate based on the value of the vehicle?

It used to be that once cars reached a certain age, you could consider not having comprehensive coverage because they weren’t worth very much.  With the increase in the value of even very old cars, this probably isn’t as much the case any more.  It can still be a good thing to assess periodically.

Can you raise your deductible?

Do you have kids on the policy?

They may be able to qualify for good student discounts.  If they are only a part-time driver because they are away at college without their own car, they may get a reduced rate.

Umbrella Insurance

Once you amassed a certain level of wealth, it can be important to consider adding an umbrella policy.  Umbrella policies provide protection over and above your homeowners’ and auto policies.  Umbrella policies are relatively cheap for the amount of coverage you can get.

Discounts

If you’re talking to your insurance carrier about your policy, ask them about discounts you might qualify for.  There is the standard bundling discount for multiple policies, but there are many others from having home alarms to not having any claims for several years to multiple car discounts.

Wrap Up

With the increase in the cost of insurance, now could be a great time to review your policies to see if there is a way to save some money.  While I’ve hit the highlights, this checklist (link) has some other information you should consider.

Want to talk about your insurance or any other financial topics?  Contact a MFAA member today.  You can find the list of MFAA Advisors here.

Categories
Taxes

SECURE Act 2.0

Compass with arrow pointing to the word Retirement

Congress passed the Omnibus Spending Bill on December 23, 2022.  Included in the monstrous 4,000+ document were numerous changes to retirement savings accounts collectively known as SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement Act).   It builds on the original SECURE Act, which was signed into law in December 2019.

Admittedly, most of these are small changes.  They don’t rise to the same level of the elimination of stretch IRAs in the original SECURE Act.  That doesn’t mean you shouldn’t be aware of the changes and how you it might impact your planning.

Here’s the TLDR Summary of this post and the most impactful SECURE Act 2.0 provisions:

  1. Pushed back the age for starting required minimum distributions (RMDs) to 73 for those born between 1951 and 1959 and to 75 for those born in 1960 or later
  2. Tax credits for military spouse employers
  3. Reduced the penalty for missing a Required Minimum Distribution (RMD)
  4. Employer matches to Roth accounts
  5. Eliminates RMD requirements from employer Roth accounts
  6. Increased the allowed contribution to a Qualified Lifetime Annuity Contract (QLAC)
  7. Increased retirement plan catch-up contributions for those aged 60-63 starting in 2025
  8. Allows a 529 to Roth IRA rollover starting in 2024
  9. Allows for a $50,000 IRA Charitable Rollover to a Charitable Gift Annuity or Charitable Remainder Trust
  10. Student Loan Debt “Matching”

1.  Pushed back the age for starting required minimum distributions (RMDs)

The SECURE Act 2.0 extends the required minimum distribution (RMD) age from 72 to 73 for those born between 1951 and 1959.  For those born in 1960 or later, the age is extended to 75.  RMDs are the minimum amount that must be withdrawn each year based on the owner’s age.   This applies to certain retirement accounts such as traditional IRAs, 401Ks, and Thrift Savings Plan.  The purpose of RMDs is to ensure that retirement accounts are eventually distributed and taxed.  This prevents them from being used as tax-deferred savings vehicles indefinitely.  The extension could allow for increased tax savings options by giving you an additional year (or 3) to perform Roth conversions or take distributions to draw down the account before it becomes mandatory.

2.  Tax credits for military spouse employers

There is a special provision for military spouse employers who offer retirement plan participation with immediate vesting or access within 2 months of hiring.  Employers can receive a tax credit of up to $500 for each military spouse.  This benefit will hopefully incentivize employers to offer retirement plan access to military spouses who often change jobs before they have met the requirements to fully participate in a company’s retirement plan.

3.  Reduced the penalty for missing a Required Minimum Distribution (RMD)

The SECURE Act 2.0 reduces the penalty for missing an RMD from 50% to 25%. If an individual fails to take the required minimum distribution from their retirement account, they were typically subject to a penalty equal to 50% of the amount that should have been withdrawn. Starting in 2023, the SECURE Act 2.0 reduces this penalty to 25%. It further reduces the penalty to 10% if the RMD is fixed within the “correction window.”  This change is intended to provide relief to individuals who may have missed an RMD due to unforeseen circumstances.

4.  Employer matches to Roth accounts

The new law allows employer matching contributions to be made to a Roth 401(k) or Roth 403(b) account. Currently, employer matching contributions can only be made to a traditional 401(k) or 403(b) account, which are funded with pre-tax contributions and are taxed as ordinary income when withdrawn. The SECURE Act 2.0 would allow employers to make matching contributions to a Roth 401(k) or Roth 403(b) account, which are funded with after-tax contributions and are tax-free when withdrawn if certain conditions are met. This change is intended to give employees the option to receive their employer’s matching contributions in a tax-free account, rather than a traditional account that is taxed as ordinary income when withdrawn.  Any employer money contributed to a Roth will be reflected as income to the employee for current-year tax purposes.

5.  Eliminates RMD requirements from employer Roth accounts

The RMD requirement for employer-sponsored Roth plans (Roth 401K, Roth 403B, Roth TSP, etc) will be eliminated in 2024.  This eliminates the disparity between Roth employer plans and Roth IRAs which do not have an RMD requirement.  It will allow employees who are happy with their plan to not have to roll over their accounts to Roth IRAs to avoid forced distribution.  This is great because it allows for continued tax-free growth.

6.  Increased the allowed contribution to a Qualified Lifetime Annuity Contract (QLAC)

The SECURE Act 2.0 increases the maximum contribution to a qualified longevity annuity contract (QLAC) to $200,000.  It also eliminates the maximum percentage of an individual’s retirement plan balance that can be used.  QLACs are a type of annuity that provides a guaranteed stream of income starting at an advanced age, such as 85 or 90. The purpose of a QLAC is to provide a guaranteed source of income in retirement, which can help individuals ensure that they have enough money to cover their expenses in old age. By increasing the maximum contribution to a QLAC, the SECURE Act 2.0 allows individuals to set aside more money for their retirement and provides them with the option to purchase a QLAC with a larger payout.

7.  Increased retirement plan catch-up contributions for those aged 60-63 starting in 2025

The law also increases the retirement plan catch-up contributions for those aged 60 to 63 in 2025. Currently, individuals aged 50 and over are eligible to make catch-up contributions, which are additional contributions above the regular contribution limit. The SECURE Act 2.0 increases the catch-up contribution limit for individuals aged 60 to 63 in 2025 from $6,500 to $10,000. This change is intended to give individuals in this age range the opportunity to save more for retirement and potentially make up for any shortfall in their retirement savings.

Additionally, catch-up contributions for higher-earning employees (currently above $145,000) must have contributions made to a Roth portion of the plan.  This will require these employees to use after-tax dollars for these contributions.

8.  Allows a 529 to Roth IRA rollover starting in 2024

The SECURE Act 2.0 allows for a 529 to Roth IRA rollover starting in 2024. Currently, 529 plans (education savings plans) can only be rolled over to another 529 plan or used for qualified education expenses. The SECURE Act 2.0 would allow individuals to roll over funds from a 529 plan to a Roth IRA tax-free.  The lifetime maximum transfer amount is $35,000.

9.  Allows for a $50,000 IRA Charitable Rollover to a Charitable Gift Annuity or Charitable Remainder Trust

The SECURE Act 2.0 creates Roth SEP IRA and SIMPLE IRA options. Currently, SEP IRAs and SIMPLE IRAs (retirement plans for small businesses) can only be traditional IRAs.  Traditional IRAs are funded with pre-tax contributions and are taxed as ordinary income when withdrawn. The SECURE Act 2.0 allows individuals to open a Roth SEP IRA or SIMPLE IRA.  These are funded with after-tax contributions and are tax-free when withdrawn if certain conditions are met.

10.  Student Loan Debt “Matching”

In 2024, employers can provide matching retirement contributions for employees who are making student loan payments.  Employees who weren’t able to pay down their loans and save for retirement will not lose the matching dollars from employers.

There are other many other more nuanced topics in the new law.  These are the ones I felt had the most applicability to the broadest population.  If you’d like to read more about some of the more nuanced topics like the expansion of annuities in retirement plans, improving the access to retirement plans for part-time employees, distributions for long-term care, or provisions around small business retirement plans check out this article.

If you have questions about how this impacts you and your retirement planning consider setting up a call with one of the MFAA advisors who can help you navigate all of these changes.  You can find them here.

Categories
Financial Planning Taxes

End-Of-Year Planning Checklist

End-Of-Year Planning Checklist Pg 1

If you’re like me, you’re probably thinking how can it be December?  Where did 2022 go?  Before we turn the page to 2023, there could be some actions you could take to improve your financial situation.  The major categories are assets and debts, tax considerations, cash flow and timing, insurance, and estate planning.  I’ll walk through the common things that could apply.  I’ll also encourage you to download the PDF of this 2-page End-Of-Year Planning Checklist to run through the whole thing.

Assets & Debt Issues

  1. Unrealized investment losses in your taxable accounts – Let’s face it…2023 has been a brutal year for investors. Tax loss harvesting is the selling of investments that are now below what you paid for them. This can be used to offset other taxable investment gain.  You can also write off up to $3,000 per year against your income if losses are larger than gains.  This can be a great strategy in down markets.  [There specific rules regarding selling and buying the same or very similar securities called the wash-sale rules.  Make sure you understand this or talk to a financial professional]
  2. RMDs – Ensure you are taking any required RMDs. This could be for your own account if you’re 72 or older or you have an inherited IRA.  The IRS recently proposed new rules for inherited IRA distributions based on the 10-year rule in the SECURE act.  This has created some confusion because they aren’t official at this point (11/2022).  Again, consult a financial professional if you’re in this situation.

Tax Planning

  1. Income Changes – Are you approaching military retirement? Are you planning to work after?  If so you’re income and tax bracket may increase significantly.  If so, it may make sense to contribute to a Roth IRA or Roth TSP while your income is lower.Are you approaching your ultimate retirement?  Will your income drop in the future?  If so, that can be a great time to defer taxes by using a Tradition IRA or retirement account.  This can be especially powerful if you’ll have lower income years where you can convert from a Traditional account to a Roth.
  2. Charitably inclined? – The standard deduction has increased significantly.  This limits your ability to itemize taxes.  You could consider charitable contribution stacking or bunching.  I posted this example on LinkedIn you could check out if interested.

Cash Flow

  1. Increasing savings – The maximum salary deferral to an employer plan is 20,500 plus the over 50 catchup of $6,500 for 2022.  You’ve got limited time to make changes for this year, but next year this increases to $22,500 and the catch up goes to $7,500 so if you’re maxing out your contributions know you’ll have to increase your withholdings next year.
  2. 529 Accounts – You can use your annual gift exclusion to contribute up to $16,000 to a beneficiary’s account tax free.  This can be a great option for grandparents who want to help out their grandchildren.

Insurance Planning

  1. FSA – Make sure you spend any FSA funds or see what your employer has for options.  This might include a partial rollover of funds to next year.
  2. Health Insurance Deductible – If you’re over your deductible, consider whether incurring other medical expenses this year makes sense before your deductible resets.

Estate Planning

  1. Annual gift exclusion – Gifts up to the annual exclusion amount of $16,000 (per donor, per year, per donor) are tax free.  A couple could gift $32,000 to a child tax free.

College Planning

  1. Financial Aid and Taxes – Do you have a high schooler?  It’s important to know what year your tax return will be used for filing the FAFSA.  This can get confusing because school years don’t line up with tax years.  The FAFSA uses taxes filings from the year the student starts their junior year.  Since that’s September, the tax year starts in January of the sophomore year.

The end-of-year planning checklist has other considerations tax bracket thresholds, significant windfalls from stock-based compensation, business expenses, FSAs, etc. that might apply to your specific situation.  Some of these things are complex and nuanced.  This isn’t tax or legal advice so make sure you consult with your tax professional.

If you need help building a plan around any of these items the advisors at MFAA are available to help.  Check out their profiles here and schedule a meeting to make 2023 your best year ever.

Categories
College GI Bill

5 Mistakes To Avoid When Splitting the GI Bill

Picture of college buildings
Photo by Dorian Le Sénéchal on Unsplash

5 Mistakes To Avoid When Splitting the GI Bill

The Post 9/11 GI Bill is a fantastic benefit for those who served in the military after 9/11/2001.  The ability to transfer the benefit to military dependents makes it even better.  It also makes the planning to use it most effectively much more challenging.  Many people decide to simply split their benefit between multiple children.  Here are 5 mistakes you should consider before doing that.

Background

The Post-9/11 Veterans Educational Assistance Act of 2008 provides military members who served at least 90 days on active duty after September 10, 2001 and received an honorable discharge Post 9/11 GI Bill benefits.  These include tuition and fees (up to the 100% cost of in-state tuition), monthly housing allowance, and a book stipend.  The Services created rules allowing this benefit to be transferred to dependents as a retention tool.  [MFAA published a great primer on the Post 9/11 GI Bill so if you need a refresher check that out.]

Cost of College

When determining how to effectively use the GI Bill, especially if you’re splitting it, it’s important to understand what you would have paid out-of-pocket without the GI Bill.  You can then compare the value to determine how to use it.  Determining what you’ll actually pay can be a challenge, but it starts with the Free Application For Student Aid (FAFSA).  [MFAA has a great post on FAFSA]  You’ll get your Expected Family Contribution (EFC) from the FAFSA.  There are numerous calculators that will estimate your EFC including this one from the US Department of Education.  Schools also have a Net Price Calculator which will give you an estimate of what you’d end up paying.

Armed with this information, you can start to build your plan.  Here are 5 mistakes or considerations you should understand as you do that.

Mistake 1:  Not using the benefit for you or your spouse

If you or your spouse could use the GI Bill and meaningfully improve your income over the rest of your lives, that may be a better plan than giving it to your children.  If you believe you could improve your salary by $30,000 per year for 20 to 25 years, you’d earn an additional $600,000 to $750,000.  The difference in earnings could be used to pay for college for your children and also improve your quality of life.

Mistake 2:  Not understanding how your Expected Family Contribution could change with your income

The biggest factor in whether you’ll qualify for financial aid is the parent’s income.  If your income will increase significantly in the future, it may make sense to wait to use the GI Bill.  Let’s look at an example:  E-7 with 2 children (Sr in high school, 7th grader) & spouse who is not currently working outside the home.  The income used for the FAFSA will be basic pay and any bonuses, but it does not include BAH so the oldest child is likely to qualify for some need-based aid.  Fast forward 5 years, the E-7 recently retired and has gotten a job that pays 20% more than their military salary.  They also get retirement pay and the spouse has also returned to work.  Their income is much higher and if the retiree qualified for VA disability payments, those will be added also.  The EFC for the younger child will be (significantly) higher.  Splitting the GI Bill evenly would mean the family will pay more out of pocket for the second child.

Mistake 3:  Not understanding the school’s financial aid model

Colleges operate based on a few different funding models. Some schools provide assistance primarily based on financial need while others offer scholarships based on student achievement. Let’s look at a few examples:

Ivy League & elite private schools

These schools typically have huge endowments and operate “need-blind” meaning if you can get in they’ll typically provide aid for costs above your EFC. This can be a great deal for lower-income families. They don’t offer merit scholarships so you’ll pay if their formula calculates you can afford it.

Smaller Private Schools & some State Schools

These schools are typically competing for the best students so high-achieving students can get significant merit aid. Attracting top student talent allows them to move up the rankings so they can compete better. Many schools publish their SAT/ACT and GPA matrix that will show you exactly what type of scholarship you are likely to receive.  The goal here is to be in the top 25% of admitted students to get the most merit aid.

Public Schools

In-state tuition typically has a lower listed price than private schools, but they may not be as generous with either need-based or merit aid. Attending a public school out of state maybe even more expensive than a private school because they are less likely to meet the out-of-state need or offer merit scholarships.

Understanding your EFC and your student’s competitiveness can allow you to focus on colleges that will meet their needs while not being unaffordable or requiring excessive debt which could allow you to save your GI Bill benefit for another child.

Mistake 4:  Not considering differences between the children

Each child is unique with different talents and ambitions.  This may impact what they choose to do or how they might use the GI Bill.  It is important to factor this into the decision with the school’s financial aid model.  For families whose children have a significant gap in ages, this will be more difficult.  If you have a high-achieving student who might be able to earn significant merit aid it might make sense to not use the GI Bill for them.  That is as long as they aren’t planning to try to go to an elite school (Ivy League and some others) that don’t offer merit aid.

Mistake 5:  Not factoring Basic Allowance for Housing and Yellow Ribbon into the calculation

The Basic Allowance for Housing (BAH) benefit and Yellow Ribbon program at some schools can add significant value to the GI Bill.  BAH for schools in larger cities on the east or west coast will typically be much higher than for a midwestern, small-town school.  Some families will use the GI Bill for tuition for an older child, but make the child pay for their room and board.  They then take the BAH and invest it to use for their younger children.

The GI Bill only covers costs up to the tuition price of the most expensive state school.  Many private schools have higher costs.  Yellow ribbon schools provide additional money (which is matched by the VA).  It can be hundreds of extra dollars up to full tuition.  This can vary from school to school and even programs within a school.  Some schools cap the number of yellow ribbon students they will provide funding for while others are unlimited.  You can find more information here.

The Post-9/11 GI Bill and its transferability is a great benefit potentially worth hundreds of thousands of dollars.  There are many factors to consider when deciding how to best use it especially if you’re trying to stretch the benefit across multiple people.  Understanding these common mistakes should help.  If you’ve got additional questions, consider scheduling a call with one of the MFAA financial planners.  They can help guide you through these considerations and other financial questions you might have.