Inflation is definitely a concern, and the media frenzy around current inflation likely isn’t helping ease your current fears. While you are right to be concerned about inflation, it doesn’t necessarily mean it will threaten your retirement plan, even if today’s inflation lasts longer than we first expected.
| Inflation is surprisingly more dangerous than a market crash. |
| Inflation Vs. Social Security and other ‘Guaranteed’ Income |
| Using Multiple Inflation Rates |
| What Should You Do? |
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I am sad you have to deal with this and it’s unfortunately not uncommon for annuity sales representatives to misrepresent the annuity. As for what to do next, you should determine if it would be better to continue the annuity or give up the money you have already put into it and instead invest using a different strategy. Even though the annuity is a bad investment…
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Trends have shown student loan debt rising significantly over the years, significantly overtaking credit card debt in total debt owed by Americans. From one perspective, this feeds into the narrative that student loan debt is the biggest problem we are facing and that consumers are going crazy over education debt. I choose to look at it differently (and more positively).
Student debt isn’t the worst debt
Credit card debt is down 40%
Increased degree attainment
Broader planning reduces / increases the problem
How much to use will depend on the rest of your financial situation, including your monthly income, the size of your emergency fund, whether you are on track for retirement savings, and even the terms of the divorce. While it is important you get a place of your own, take your time with this decision. You don’t want your excitement over buying a new home to overshadow your rational analysis and decision-making.
Also Covered:
Impacts on monthly cash flow are key
Don’t overspend, especially in this market
Don’t unravel the fairness of the divorce settlement with the home purchase
Following ongoing pandemic impacts and a high inflation report markets again were impacted by the shocking invasion and bombing of Ukraine by Russia. Historically, geopolitical events have had short-term impacts on the world economy and investment markets, so the humanitarian impact is likely to be much larger than the economic one. Also covers:
Historical market reactions to wars and geopolitical events
How you can help Ukraine
I applaud you for beginning the process of building a property portfolio while you are in college. Generally speaking, you will not be able to get a mortgage without a steady history of income that is both stable and sufficient to pay the mortgage. With a 50% down payment, it is possible to get an asset-based loan, which will be approved primarily based upon the equity in the home, even without a steady personal income. Based on the numbers you have provided, however, I would not recommend going that route.
Investment real estate requires more cash than just the downpayment
There are safer and easier real estate investment alternatives
Since you have already saved up the money, it would be best to use the cash to pay for the addition and avoid the home equity line of credit (HELOC). Taking out the HELOC would cost you interest, even if it is a small amount, and there is no reason to pay your bank the interest if you don't have to. The following two scenarios may help.
Scenario 1: Get the HELOC and Invest
Scenario 2: Pay Cash
Scenario 3: Get the HELOC and a mistake
There is a good chance you will pay 0% in taxes on the sale of your home. The tax code has a provision for the sale of your primary residence where you can shield profit from taxation, called the primary residence exclusion. If you have been living in the house for at least the past two years, you can qualify to avoid taxation on the profit from your home, up to a total of $250,000 if you are single or $500,000 if you are married.
You may not be able to avoid all taxes
You only pay taxes on profit
You may owe no taxes
This is a more complex question than it may seem at first. From a simple perspective, you want to analyze what the true expected future rate of return is on the property including all costs such as maintenance, future upgrades, vacancy, taxes and more. Then compare that true rate of return with the other options you have for the money, accounting for differences in risk.
Also Covered:
High Valuations = Lower Expected Future Returns
Impact of taxes and transaction costs
Your desired life trumps the money
How you invest, or even if you should invest, needs to be determined by when you need the money. Based on the details you provided you shouldn’t look at investing it at all for the half you need in the next 2 years. For clients in this situation, I recommend keeping the money needed in two years in a federally-insured savings account. Both the risk and the cost of investing would end up being against your best interest.
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When investing, you will want to manage your investments in both your SEP and Roth IRA as one whole portfolio and not as separate entities. This means making sure you are not invested too heavily in a single asset . . . .
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Placing your student loans in forbearance would be a mistake. The loans will continue to accrue interest, which will mean less of the money you pay at the end of the year will pay down the debt because you have extra interest payments. I would recommend exploring a few other options first (listed below) and then choosing which is suitable for your goals. You may want to hire a fee-only financial planner to run the numbers on the options and provide some clarity on what each option would mean to your retirement goals, buying a home, and other savings.
REFINANCE THE LOAN
CUT BACK ON RETIREMENT SAVINGS
DELAY HOME PURCHASE OR OTHER SAVINGS GOAL
It sounds like you’re state requires service-only businesses to track and collect use taxes. As a result, you’ll likely need to get a Consumer’s Use Tax Account in your state. This is going to be very state specific so it might be worth talking with your CPA or finding one who is familiar with business taxation in your state.
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You seem to be doing well overall with your financial strategy, so the focus will be on optimizing what you are already doing. The following are a few of the most common practices for reducing your income, although I'd need to understand more about your actual situation to be able to guide you in the right direction. I have also included the approximate amount you could reduce your taxable income by with each strategy.
CONTRIBUTE MORE TO YOUR WORKPLACE PLAN
SEE IF YOU HAVE A 457 PLAN
CONTRIBUTE TO HEALTH ACCOUNTS
SEEK A COMPREHENSIVE FINANCIAL PLANNER
Budgeting shouldn’t be a limiting exercise designed to tell you how to spend your money. At its best budgeting is a tool for organizing your financial resources toward your great life, both now and in the future.
Also Covered:
A Better Version of Budgeting
Opportunity Cost
Changing Costs
Changing Priorities
I am so sorry this happened to you. Unfortunately, your situation is a common one for people when they retire or change jobs and move their 401(k) account. Handling this rollover on your own creates a lot of tax problems, even if you do everything perfectly. Below are some ideas to help you, but first the answer to your initial tax questions.
ALSO COVERED:
What Happens to Taxes.
Doing a 401(k) or IRA Rollover On Your Own.
Fixing an Indirect Rollover.
Making Up The Lost Retirement Account Balance.
Managing Taxable Investments vs. Retirement Investments.
The newest IRS Form W-4 provides a new process to accomplish the same goal as exemptions did in the past. In fact, the new form more clearly connects setting your withholdings with the process you will use in April to fill out Form 1040 and file your taxes.
ALSO COVERED:
Filling out the form
Getting to an exact withholding number
Getting payroll estimates from HR
Severance packages are considered compensation by the IRS and are taxed the same as other income from a job, but this means not all of your severance is subject to taxation. Reviewing the terms of the agreement with your CPA or financial advisor can help you know exactly how it is taxed. If you are still negotiating your severance, you have an opportunity to lower your taxes by changing the terms of the package.
ALSO COVERED:
The Severance Agreement
Estimating Tax Withholdings
Avoiding Taxation — healthcare & fringe benefits