Here are seven money strategies for you to consider acting on in 2015:
Start an after-tax investment account
Aside from the benefits of compound growth in the stock market versus the current paltry rates on cash at the bank, there are many other benefits to taxpayers with a mature after-tax investment account. Preferred capital gains rates, opportunities to gift appreciated assets, liquidity, and the aforementioned compound growth.
Open a 529 account for college savings
The benefits of a 529 plan include tax-free growth on your contributions, tax-free withdrawals as long as the monies are used for higher education expenses, and in many cases a state income tax deduction for contributions up to a certain level. Nebraska, like most states, has one financial institution that sponsors 529 plans. First National Bank of Omaha’s NEST 529 is the Nebraska state-sponsored plan. You can contribute up to $28,000 per beneficiary annually (married filing jointly), while the state income tax deduction limit is $10,000…still a nice benefit. Online enrollment for these plans is pretty easy and straight-forward.
Charitable Giving Accounts
We’ve written about these before and we will continue to hammer the point home. When you make a charitable donation of $1,000 cash you receive a current year tax deduction of $1,000. A single tax benefit. With a charitable gift trust (also known as a donor-advised fund) you transfer appreciated securities, receive an income tax deduction for the fair market value, and you avoid capital gains taxes on the contributed securities. A double tax benefit. Example: You bought 100 shares of Pepsi (PEP) on 1/1/13 for $69.33 ($6,933 cost basis). On 01/30/15 you transfer those 100 shares with a current price of $95.33 and current market value of $9,533 into your charitable gift trust account. You receive a current year tax deduction of $9,533 AND you don’t have to pay tax on the $2,600 capital gain. Then once the monies are in the charitable gift trust, you can reinvest the monies and get the added benefit of tax-free growth. Then when you are ready to donate to a charity, call P&A and we’ll handle the rest.
Max out your retirement contributions
The elective deferral limits have gone up to $18,000 per person + $6,000 catch up provision if you are 50 or older. If you’re self-employed, there are many strategic retirement plans to set up at minimal cost (individual 401k, SEP-IRA, etc.), which could allow you to defer up to $53,000 in 2015. Ask P&A what your best options are.
Utilize the Roth provision in your 401k
If your adjusted gross income (AGI) is $193,000+ (for married filing jointly) or $131,000+ (single filer) then you are phased out of being able to contribute to a Roth IRA. However, if your qualified plan has a Roth provision, the income phase-out does not apply. You could, in theory, contribute 50% of your elective deferral to Roth and 50% to traditional each year…or any other combination.
Consider a Health Savings Account
With the Affordable Care Act, Health Savings Accounts are becoming more and more prevalent and attractive. If you think about it, it solves a lot of our healthcare system’s problems. With a High Deductible Health Insurance plan, you pay the entire freight of your deductible. There are various options, but those deductibles will typically range from $2,600 up to $10,000. So, if you have a $5,000 deductible plan you will pay 100% of the costs up to $5,000, and then in some plans, 0% after that. The tradeoff is that you can pay for all medical expenses through a Health Savings Account (HSA). You can set one up at most banks. A family can contribute up to $6,650 per year (for 2015) into one of these accounts, and receive a full tax deduction for that amount. You get a debit card and pay all medical expenses through that account. Whatever you don’t use you can roll into the next year.
Refinance your mortgage
If you have refinanced over the past 3-5 years you probably thought you were locking in the lowest rate you would ever see. Well, time to think again…rates have gone lower (yet again). Current 10- or 15-year rates are around 2.75%, while 30-year rates can be had for 3.5%, and home equity loans depending on size can be as low as 4.25%. Those are some seriously low rates! Now, there are closing costs involved in refinancing, typically in the $1,500 to $2,000 range. If that amount can be recouped in interest cost savings over the first two to three years of your new loan, refinancing is definitely worth looking into.
Best of luck in 2015. As always, P&A is here to collaborate and help you sort through these strategies to determine whether or not they are right for you. Remember, you pay us one fee to manage your investment account, but it’s through all these ancillary (and complimentary) services that we add the most value. It’s up to you to get as much work out of us as you can!