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College Planning the Right Way

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So you want to send your child to college?   Perhaps you desire to go to college yourself.  Excellent!  First, congratulations.  Pursuing higher education is often a good move.  Why?  One reason is labor studies continually prove there is a direct correlation between educational level and income.  In other words, study more, earn more.  Benjamin Franklin once said, if a person empties their purse into their head, no one can take it from them.  Wise advice!

Now about that “emptying your purse” part….

It is no secret that college is expensive.  Generally speaking, the average inflation rate is 3% per year.  The historical educational inflation rate is closer to 5% per year according to the Bureau of Labor Statistics.  In other words, the cost of school is truly increasing.  Is it possible to send a student to college without sending their parents to the poor house?

Fortunately the answer is yes.  I can honestly say there is no cookie-cutter solution.  I have seen many strategies over the years.  For example, options include:  student loans, second mortgages, second jobs, enlisting the prospective student(s) in the military, grants, scholarships and so forth.  The trouble with many of these strategies in they usually involve being saddled with long term debt!  That is no fun.

Please keep in mind, when it comes to building wealth, there are two basic principles that are always at work.

1. Debt is the enemy of your wealth.
2. Taxes are the enemy of your wealth.

When it comes to financing college, is it possible to legally avoid taxes and reduce debt?  Fortunately, yes!  The tax code allows smart parents to start college savings plans, notably Coverdell Educational Savings Accounts (ESAs) and 529 plans.  The key is to begin early.  Why invest in a college savings plan?  Let me ask you two questions:
1.  Would you rather pay the bank interest for several years or would you rather the bank paid you interest for several years?
2. Would you rather pay more in taxes or less in taxes?

Most of us would rather pay less in taxes and earn more money.

With the right college savings plan it is possible to 1)  Earn interest on your investments,  2) Withdraw qualified distributions tax free and  3) Earn an income tax deduction in certain states, such as Colorado.  Withdrawals can also be coordinated with additional tax credits, such as the American Opportunity Credit.

The choice is really simple.

Do you want to go to college?  Do you prefer to be debt free when college is complete?  Do you want to take advantage of some amazing tax breaks?  If the answers to these questions are yes, please call us.  Starting a college savings plan requires discipline, careful planning and expertise.  We can help.  Call today to discuss which college savings plan may be right for you

 

Written by Michael Angell, CFP®, EA
Castle Rock Investment Company
Copyright 2017
303.719.7523
Michael@CastleRockInvesting.com

Getting the Facts Straight about Qualified Plan Loans

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Are you considering making a large purchase but don’t have the money to do so? Are you in need of emergency cash? Typically, they are many options for people in that situation such as a home loan, a home equity line of credit, personal loans, etc. But what if you do not want to deal with a bank or have a poor credit score? Fortunately, there are a few options, with the most notable being the Qualified Plan Loan. That’s right, you could be able to take a loan from your employer’s retirement plan. In fact, over 75% of Qualified Retirement Plans allow participants to take loans from their accounts.

So now to the big question…is it worth taking a loan from your retirement plan? In short, no. However, it is still important to weigh the options of taking such a loan. Below are the major pros and cons of taking loans from your employer’s retirement plan.

Pros:
1. Qualified Plan loans offer a low interest rate, which is usually the prime rate plus 1%

2. You are not borrowing from a bank; you are just borrowing from yourself. In other words, the interest that you pay will actually go into your retirement account balance. (However, please note that all loan payments going back into the plan are in after-tax dollars).

3. The loan process is typically very easy and you can get the needed cash in a timely manner. On top of that, payments are simply deducted from your paycheck.

4. Loan minimums can be as low as $500-1,000 and people can borrow up to 50% or $50,000 of their vested balance, whichever is less.

Cons:
1. Payment options are not as flexible as other loans since the only two options are the minimum payments deducted from your paycheck or to pay the balance in full.

2. You have 90 days to start making payments back into the plan or else the loan will be considered taxable and will trigger a 10% tax penalty (for borrowers under 59 ½). Remember, if you are laid off, you may only have 90 days to pay the remaining balance in full or the loan will become a taxable event and will also trigger the 10% tax penalty (for borrowers under 59 ½)

3. People who borrow from their employer retirement plan may face loan fees, i.e. loan origination fees, loan maintenance fees, etc. And if the loan is particularly small (say $1,000 for an example) you could theoretically be paying 15% just in fees, which will not go back into your plan.

4. Finally, there are major opportunity costs associated with a Qualified Plan Loan. For example, if the borrowed funds in your account can potentially earn an average of 8% a year while your borrowed funds can only earn a theoretical 4.5% with the interest from the loan, you could theoretically be losing money (depending on market conditions).

In the end, a Qualified Plan Loan may not a great idea for those who have other means of getting an affordable loan and in most cases should only be used as a last resort.

So, how can someone get money for large purchases without going to a bank or borrowing from their retirement plan? For starters, people can make it a monthly habit to contribute to an emergency fund and/or a special purchase(s) fund so that they will not have to borrow money in the first place (please read our previous blogs on emergency funds and on general savings tips).

Overall, borrowing can be quite a hassle and could be costly in the long run no matter how you look at it. However, if you develop a plan for making a large purchase or plan ahead of an emergency, funding these events in our lives can be a much smoother and inexpensive process. If you currently do not have a plan, contact Castle Rock Investment Company to help you reach life’s major financial milestones, we will always work in your best interest!

Major Move by Merrill Lynch to Comply with Fiduciary Rule

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By Mack Bekeza

In order to comply with the upcoming Fiduciary Rule, Merrill Lynch decided to discontinue offering commission based IRA accounts to investors starting April 10th of 2017. Specifically, they want to remove a major conflict of interest between them and their clients by only offering fee-based advisory, robo-advisory, and self-directed services for IRA accounts. Merrill Lynch’s decision is expected to have a major ripple effect for not only their clients, but for their advisers and their respective competitors.

So, how does Merrill Lynch’s decision affect their advisers and their competitors?

  1. As of April 10th of 2017, the firm’s 14,000 plus advisers will no longer be able to open new commission based IRA accounts, which is a notable source of their compensation. On top of that, advisors will now have to further prove their value to their clients when their primary form of compensation will be under a fee based model.
  2. Since Merrill Lynch is one the first major wirehouse firms to make this move, it is expected that other wirehouse firms will also follow suit in order to remain competitive in the upcoming Fiduciary focused marketplace.
  3. Merrill Lynch as well as other wirehouse firms will more than likely face other regulatory issues such as having fee-based variable compensation, which will be prohibited under the Fiduciary Rule.
  4. This might lead to certain broker dealers to no longer service IRA accounts due to additional costs of complying.

Although we believe this is an excellent move by Merrill Lynch, we believe that wirehouse firms such as Merrill will still face regulatory issues as they may have to forgo recommending certain investments to clients as well as having to develop a truly uniform method of compensation from their IRA accounts.

Water Cooler Wisdom: Third Quarter 2016

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By Mack Bekeza

The Presidential Election and What to Know

Despite the pleasant performance in the stock market for 2016, investors are becoming more doubtful about the global economy as a whole in regards to how “pleasant” future growth will be. On top of that, The U.S is having one of the most interesting presidential elections in history. With both of the leading candidates making big promises to the public, how will these proposed actions affect the economy as a whole? But perhaps the biggest question and misconception that U.S investors have is “How does the President affect the economy?”

For our response, we want to point out 3 big myths about how the President affects the economy

            1. Capital Markets perform better when Republicans are in the White House:  

Although many consider the Republican party as the “pro-business” party, if you look at the returns of the Dow Jones Industrial Average since 1897, the markets do not give a hoot about who is president.

2. Major pieces of legislation get passed once the new President assumes office:

With the exceptions of the Affordable Care Act and Dodd-Frank, The United States rarely makes major policy changes in one major swoop, rather in small increments.

3. The President has as much of an impact on the economy as consumers and businesses:

     Although the media places major scrutiny on the President over the U.S Economy, government spending only accounts for 17.7% of total GDP, while the remaining 82.4% comes from consumer spending, private investments, and foreign trade.

So… will this presidential election completely change the way we invest? More than likely no. However, it is important to note the U.S GDP is expected grow between 1.5 to 2% over the next decade. This is primarily due the recent and projected dismal growth in the U.S labor force along with over $30 trillion in private wealth being transferred to younger generations. In other words, it is more crucial to observe how Millennials begin to take charge of the U.S Economy rather than who becomes president.

Attached are slides that provide more detail regarding presidential elections and major leading economic indicators.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@CastleRockInvesting.com.

 

State Farm and Edward Jones React to the Fiduciary Rule

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With April 10th, 2017 quickly approaching, a large number of investment firms and insurance agencies are scrambling to comply with the DOL fiduciary regulation. However, some firms believe they have found a solution to the upcoming rule. Knowing that their representatives cannot put their clients’ interest first, State Farm and Edward Jones have announced plans to prevent their employees from selling mutual funds when the new fiduciary rule takes effect next April.

So how will they be able to do this without significantly reducing their revenue? State Farm plans to only sell and service their mutual funds, variable products, and tax-qualified bank deposit products by a self-directed call center, as opposed to having their agents sell the products directly. In other words, State Farm still wants their customers to purchase these products while being able to avoid liability if the product turns out not being in a customer’s best interest.

Edward Jones’s solution involves curtailing retirement savers’ access to mutual funds in commission based accounts and lowering their investment minimums. Basically, Edward Jones is planning to shift completely into the fee only side of compensation for retirement accounts and allow more investors to move their money to them.

Although it will be interesting to see how State Farm’s self-directed call center will play out, at least they have a strategy to deal with the upcoming rule. As for Edward Jones, going completely towards the fee-only side for retirement accounts is a good move as they are eliminating a major conflict of interest for recommending certain products.

Although there are a number of firms still trying to strategize to comply with the DOL rule, we are still waiting to hear plans of other advisers that sell investments that may not be in their clients’ best interest. However, we will attempt to keep you posted as more firms finalize their strategies.

HSAs and what you need to know about them!

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Since 2003, Health Savings Accounts (“HSAs”) have been an excellent tool for families to help cover current healthcare costs, along with future healthcare costs. HSAs are also known to be an excellent tax-planning tool since participants are allowed to contribute on a pre-tax basis and the funds grow tax deferred. Additionally, participants are able to make tax-free withdrawals for qualified medical expenses. Funds in an HSA may also be invested in a list of mutual funds, or even have a brokerage link for more savvy investors. On top of that, people have until April of the following year to make contributions (similar to an IRA).

With all of these excellent benefits, there are a few caveats:

  • There is a yearly contribution limit of $3,400 per year for individuals and $6,750 for family plans in 2017. If your health plan runs from January to September, you can only make contributions for these months.
  • There can be tax penalties if withdrawals are made for non-qualified medical expenses before age 65. This involves paying income taxes for the non-qualified withdrawals as well as a whopping 20% penalty.
  • In order to qualify to contribute to an HSA, individuals must have a high-deductible health care plan (“HDHP”). This means that an individual plan must have a minimum deducible of $1,300 and minimum “maximum out-of-pocket costs” of $6,550 for 2017. For family plans, the minimum deductibles and maximum out of pocket costs would be $2,600 and $13,100 respectively. You also cannot be enrolled in Medicare.
  • Finally, if you are currently enrolled in a health plan that is a part of a healthcare.gov exchange, finding a health plan that is HSA eligible for 2017 will be nearly impossible since the requirements for a health plan to be eligible for a government exchange go against the requirements for a plan to be HSA eligible.

These setbacks should not prevent people from taking advantage of these accounts. In fact, HSAs will more than likely save people money in the long term and even in the short term. With having a HDHP, premiums will be notably less expensive for individuals and families, meaning that people can use those up front savings towards HSA contributions. Also, people can reimburse themselves for medical expenses that occurred in the past as long as the HSA was opened before that expense occurred. This means that if someone needed to make a non-qualified distribution, he or she can make it appear as if they were reimbursing themselves for a prior medical expense.

Although you will have to increase your deductible and maximum-out of pocket costs, utilizing a Health Savings Account could be one of the best decisions you will make if you want to plan for future health needs, even in retirement. And, don’t forget to keep your medical receipts…you may need them later!