As many of you know because you were referred to me by contacting Dave Ramsey, the talk show personality, I am an ELP (Endorsed Local Provider) of his. For those of you who have gone thru his Financial Peace University a few of my comments are straight from his lesson plan.
Investing in Tax Deductible Retirement Plans
It is important that you have set aside an emergency fund of $1,000 and have savings equal to 3-6 months of living expenses before you invest in a retirement plan. (You do not want to be forced to withdraw money from your Retirement Plan or to borrow from your credit card to pay for an unexpected bill.)
There are many types of Investment plans, but, for simplification, I will refer to the types as either: Traditional IRA (Investment with Pre-Tax dollars); Roth IRA (Investment with After Tax dollars but earn tax free); or After Tax Investments (Invest with After Tax dollars and pay tax on the growth).
After the 3-6 months of living expenses has been set aside, I encourage you to first, invest up to the maximum that your company matches. If your company does not have a Roth 401-K, the next investment should be to max the contribution to your Individual Roth IRA. The next investment should be to maximize your contribution to the Company Retirement Plan. The maximum retirement contribution should be 15%.
If you expect to be in a lower tax bracket when you make the contribution than you will be when you make the withdrawals (i.e. a couple starting out), the Roth IRA is a better investment.
Facts to consider:
- Traditional IRA’s and Roth IRA’s invested in similar investments will net identical After Tax Returns. But the Roth IRA has more flexibility for withdrawals including the ability to eliminate or minimize the 10% early withdrawal penalty.
- Both Traditional and Roth IRA’s are protected from creditors in Bankruptcy. However, I believe that, in general, in the state of Georgia, outside of Bankruptcy, Traditional IRAs’ have limited protection from Creditors. Roth IRAs’ are not protected from Creditors.
- Most experts say that your expenses in retirement will be 80% of your expenses while working. Most people do NOT move into a lower tax bracket when they retire.
I am Debt Free
Dave Ramsey preaches the benefits of being Debt Free and showcases those individuals who become debt free by asking them to shout “I AM DEBT FREE”. Unless you are already Debt Free, you cannot imagine the feeling. Two situations that are hazardous to your financial future are: Credit Card Debt and Car Payments. You can learn more about how you can become Debt Free by attending one of the courses conducted at many locations in the local area. You can find out more about this by going to the web site: DaveRamsey.com.
Death of a Family Member
The emotional strain on spouses and surviving family members when a family member dies can be overwhelming. If financial decisions have to be made during this time, the stress levels on the survivors is exacerbated. With some preplanning, some of this stress can be minimized. One of the most important things that you can do is to prepare or update your Will utilizing a competent estate attorney.
We have a limited supply of a brochure “What do you do now” that addresses a lot of issues regarding the importance of planning, making funeral arrangements etc. While supplies last, this is available to you at no charge.
Sale of your Personal Residence
Gain or Loss on the sale of a personal residence is usually a non-taxable event. To be claimed as a personal residence you must have lived in the property for two of the previous 5 years. The IRS is very strict on this two year rule, so if you are approaching this limit call me to discuss your options.
If your personal residence is Foreclosed upon or voluntarily transferred to the lender (Deed in lieu of foreclosure) and ultimately sold for less than the Mortgage balance, a Cancellation of Debt (COD) is created. For 2007-2012 the cancellation of qualified principal residence indebtedness can be excluded from income.
Cancellation of Debt
Rental Property - Unless the owner has declared Personal Bankruptcy or is Insolvent, sale or foreclosure of rental property is a taxable event.
Credit Card Debt – Unless the owner has declared Personal Bankuptcy or is Insolvent, the amount of debt forgiven is taxable income.
