We all know that Experian surrendered 143 million US citizens’ personal information recently- so you have about a 50/50 chance of having your information compromised. And yes, Experian is giving you a year (really? Only 1 year!?) of free identity protection that should help prevent identity theft. However, you can take action to help further protect yourself- it’s called a credit freeze.
A credit freeze prevents any new potential creditors from checking your credit history and score. If a hacker or criminal has your name, social security number, DOB, home address, dog’s name, IQ number, or shoe size and tries to open an account unbeknownst to you- they shouldn’t be able to because that lender would first go to look at your credit file but aha! it is not accessible. *However, there are certain situations where companies can access your credit file even if it’s frozen per South Carolina state law*
So how do you initiate a credit freeze?
PO Box 9554
Allen, TX 75013
PO Box 105788
Atlanta, GA 30348
PO Box 6790
Fullerton, CA 92834-6790
OR- you can do it online, again you must do it for each company by following these links:
*Make sure to remember any usernames, passwords or PIN numbers associated with each freeze initiated
Even if this is done, I still recommend getting a copy of your credit report AT LEAST once a year. Every year, you are entitled to a free copy of your credit report from all three agencies, so please do not get suckered into paying for one.
Personally, I pulled one of my free credit reports yesterday, will view another at the end of the year, and the final in June of 2018- just to make sure nothing fishy is going on with my credit file from the Equifax breach. I highly encourage you to implement the same strategy to do your own monitoring of your credit file.
Unfortunately, in these situations there is only so much you can do, so good luck!
143 million Americans' personal information was compromised this week from Equifax, a credit reporting agency. There is a good chance your information was compromised. It is important to find out if your information was stolen, and to take the necessary steps to prevent identity theft.
To find out if your information was compromised, click here.
If you've been compromised, here's steps to take to minimize the damage: Identity Theft: A Recovery Plan
Education planning is often a component of the financial plans we develop for our clients. Residents of South Carolina should be aware of the advantages and shortcomings of our state’s 529 college saving program. It is often hard to find the information you need to make an informed choice when confronted by a prospectus that has as many supplements as original pages, so we offer this synopsis to help you understand the pros and cons of the Future Scholar program.
Paying for college can be a monumental task. Although inflation in higher education has moderated in recent years, the price of a four-year college education is still very high. To help parents meet this major expense, states have developed and offer 529 college saving plans with tax benefits that can at least ease the burden a bit. In South Carolina, the program goes by the name of Future Scholar. Like all 529 college savings plans, any US citizen can open an account regardless of income or family relationship and there can be multiple accounts for the same beneficiary so long as the combined contribution does not exceed $426,000.
The money from any 529 college savings plan can be used for tuition and fees, room and board, books, computers and other supplies required for attendance at an eligible institution. Eligible institutions include two and four-year colleges, graduate and professional programs, and certain vocation/technical schools.
Reasons to utilize a 529 college savings plan
No matter what your state of residence, there are some advantages to utilizing a 529 college savings plan that are common to all such plans.
Tax Free Growth
Your contributions grow tax free, and distributions used to pay expenses related to secondary education are tax free also. A common question is what happens if the money is withdrawn for reasons other than higher education? In that case you will pay taxes on any earnings and a 10% penalty on those earnings with your federal income tax return. However, keep in mind, you can change the beneficiaries of a 529 plan. So, if one child chooses not to go to college, you could name another child as the beneficiary and protect the tax benefits of the plan.
Estate Planning Tool
Although estate taxes no longer affect most Americans, a 529 plan can still be utilized to shift assets out of an estate for tax purposes. Using the gifting allowance, currently $14,000 per person per year, a couple could move up to $140,000 out of their estate by using the five-year contribution allowance common to all 529 college savings plans. If a contributor were to die before the five-year period has passed, some of the funds would be brought back into the decedent's estate.
A unique feature of all 529 plans is that, although the contributions are counted as a gift at the time they are made, the funds can still be reclaimed by the account owner at any time. This has some usefulness as a Medicaid planning tool for older donors.
Low Impact on Needs Based Financial Aid
Because the assets in a 529 plan are not in the student’s name, they are considered as assets available for the family contribution versus assets that the student has. Colleges expect student to use up to 20% of any assets in their name each year to pay for college, but the family contribution is just 5.64% of their “unprotected” assets.
No matter which state’s 529 plan you choose, the funds can be used to pay for college expenses at any college or university. Unlike prepaid tuition plans, with a 529 plan there is no in state requirement.
State Income Tax Advantages
For South Carolina residents, contributions to the Future Scholar 529 college savings plan could be deductible on their state income tax return. With most SC income taxed at a 5% or 7% rate, this could save you $50 to $70 per thousand dollars of taxable state income. If you itemize your federal income taxes, your net savings will be smaller because it results in a smaller federal deduction for state income tax payments.
The state income tax deduction is a valuable benefit. Even if you have not used the Future Scholar plan for your college saving vehicle, you can still use it as a pass-through account in the years when your student attends college and claim this tax benefit. This deduction for contributions to an account may be taken in any taxable year for contributions made during that year and up to April 15th of the succeeding year.
There is no requirement that the funds stay in the plan for any set period, so if your student is attending college in the fall you could still open and contribute to the plan, then immediately have the funds sent to the college or university, thereby capturing the tax savings and in effect getting a 5% to 7% discount on tuition, fees, and expenses. With the all in cost of attending college approaching $20,000 annually that would translate into savings of up to $1,400 each year.
Future Scholar Management
The SC 529 plan is managed by a group called Columbia/Threadneedle, which was born from the merger of Columbia Management Investment Distributors of the US and Threadneedle Investments of the UK. Columbia Management is owned by Ameriprise, a national broker/dealer and financial service firm.
There are two ways to invest in the Future Scholar program. If you are a South Carolina resident, you can open and fund your accounts online directly with Columbia/Threadneedle or you can invest through the broker or your choice. See the sections on fees and expenses to understand the differences.
Rating the Future Scholar Program
Each year Morningstar publishes a ranking of 529 college savings plans. The programs are put into gold, silver, and bronze categories with a couple of sub ratings for the bronze plans. The SC Future Scholar plan ranks a middle of the pack bronze for the direct option. The advisor sold options ranks lower under a Neutral Rated sub category. You can view the 2016 Morningstar rankings by clicking here.
The younger your beneficiary, the greater the value of lower fees and better fund selections. A strategy South Carolina residents can use to get the biggest bang for their buck is to initially contribute to the Future Scholar program to capture the state income tax savings. Later, they can execute a custodian to custodian transfer to a better 529 plan such as the gold rated Utah Educational Savings Plan. A custodian to custodian transfer is not a taxable event and it enables you to have your cake and eat it too so to speak.
No matter which 529 college saving plan you use the key to long term success is to start early and contribute often. Your financial planner should be able to give you an idea of how much you need to save each month or how large a lump sum you need to contribute to achieve your college funding goals. And the old adage still applies, “Fail to Plan and you Plan to Fail”.
How to Invest in the SC Future Scholar Program
Because you can only change the investments in a 529 plan twice per calendar year, many investors choose to select an age based or a risk based portfolio that is rebalanced by the plan administrator. In the South Carolina plan, you can select from the following asset allocation portfolios:
The age based portfolios are divided into Aggressive, Moderate, and Conservative tracks. With different asset allocation portfolios being used at different ages to achieve a glide path to college entrance date.
If you purchase share through a broker, there are some small differences in the allocation portfolios because they offer some actively managed fund choices not available to direct buyers.
If you are a South Carolina resident you can participate in the Future Scholar program directly online, without the need for a broker/dealer intermediary. This option offers lower expenses and fees. You can view the direct investment funds and expenses here.
Want to setup a SC Future Scholar plan yourself? You can click here to learn more and open an account.
Purchase Through a Broker
Often the SC Future Scholar plans are recommended and sold by registered representatives, or brokers. Here the pricing and expenses are higher and much harder to understand. The Future Scholar program offers funds with A, E, and Z share classes? Additionally, there are more mutual funds to select from and many of those choices are actively managed mutual funds.
It is a bit of a slog, so we’ve aggregated the fund expenses by share class based on a current (6-9-2017) program description. You can find the broker directed investment funds and expenses here. Or you can view the program description and prospectus here.
Fund Fees and Expenses Comparison
Broker Sold Fund Fees and Expenses
Legacy Capital Preservation Funds
Pricing Alternative A
Pricing Alternative AG
Pricing Alternative E
Pricing Alternative Z
Someday I'll start saving for retirement
Someday I'll get my finances in order
Someday I'll learn a new skill and get a better job
Someday I'll take that trip I have been dreaming about
Someday I'll get my will updated
Someday I'll give money to this wonderful charity
Someday I'll write the great American novel
Someday I'll open my own business
One day you will run out of somedays!
Do what you can with what you have and do it now!
Whether you’re trying to buy a home, looking to refinance or hoping to get a lower interest rate on an automobile loan - your credit score matters. Clients often ask me how they can improve their scores and the answer is the same regardless of which stage of life you’re in.
1) Increase Your Limits
This is pretty easy to do, yet most clients don’t realize it. Here’s how it’s done:
Call up your credit card company (all of them) and simply ask them to increase your limits. Some will simply increase it without any hesitation, but often this method produces only a minimal increase. When they say they’ll increase your limit by $2,000, tell them you want it upped by a significantly greater amount. What’s that amount? I recommend something unlikely to be granted- say 10-20 times your current limit.
The point here is that they’ll type in your request, which will likely to be denied, and then give you the maximum increase allowed by their computation.
This will improve your credit to debt ratio. The basic tenet here is that your credit score is positively impacted when you increase your credit to debt ratio. Here’s an example:
You have a $15,000 limit on your credit card.
You carry a $3,000 revolving balance on said credit card.
Your credit to debt ratio is: $3,000 ÷ $15,000 = 0.20 or a 20% ratio.
By adding all your limits and debts and using the above equation, you can determine your ratio.
So, even with not paying your debt down, increasing your credit limits by making a few phone calls will improve your score and cost you nothing.
Even if you pay off all your cards every month, your score will increase still if you increase your credit limits. Having the ability to borrow more but not doing so helps your score.
2) Don’t Close Old Credit Card Accounts
If a card is paid off and you don’t use it anymore, just shred it but do not close the account. Again, you want to keep your credit to debt ratio low. Having that credit line but keeping a $0 balance only helps. Further, the longer you have had a credit card open, the better for your score.
3) Pay Off All Cards Each Month or as Much as Possible
Duh, right? Everyone understands this, but I put this point here to again discuss your credit to debt ratio. Larger credit limits combined with less debt equals a better ratio- simple!
4) Spread Your Credit Card Debt Out
If you already have several cards, I don’t recommend opening another account, but you don’t want to over utilize any of your cards. You should use no more than 30% of a card’s credit limit and of course, the less the better.
5) Don’t Open a Bunch of Cards
While you want to work on decreasing your credit to debt ratio, this will actually hurt your score.
6) Pay Your Bills on Time
Everyone knows this, but if you have missed a payment make sure you get current on those bills.
Use these strategies and your score will go up. I’ve seen it happen both for myself and clients. If you’d like to know more about other strategies that can help you establish a strong financial foundation, check out our Financial Fitness program. FinFit is built to help our clients do just that!
As a financial planner, when a potential client comes to me with money to invest they often ask, “How should I start investing my money?” They know that they need to invest and have extra capital on hand to do so, but they’re putting the cart before the horse.
Before even speaking with them about their risk tolerance, current investments, potential strategies for future investing etc. I always ask, “How much is in your emergency fund?”
The answers can range from “What’s an emergency fund?” to having hundreds of thousands in a savings account. But more times than not, they don’t know exactly how much they should have in savings.
An emergency fund is a savings account dedicated to bailing you out when unforeseen financial troubles arise. This fund is for repairing your HVAC unit, fixing your car, unexpected medical bills, and especially loss of wages.
The emergency fund shouldn’t be so small that you aren’t able to cover a financial crisis without going into debt; but not so large that you have too much capital allocated in cash.
General guidelines for an emergency fund say it should be around 3 months of expenses for two incomes, 6 months of expenses with one income- for both single and married investors. This is a baseline, but your Emergency Fund should be dictated by your individual circumstances. You and your financial planner should collaborate to determine the amount that is right for you.
Once the proper amount is determined, your emergency fund should be moved into a high yield savings account. Most of us keep our savings at a big bank and receive terrible interest rates for parking our money there. While it may not seem like a lot of extra money, going from an account producing 0.01% interest vs. 1.0% interest just makes sense. Why not let your money earn the most it can for you?
For example, say you have $10,000 in your Emergency Fund:
Interest Rate Amount You Earn/Year
Bank A 0.01% $10
Bank B 1.0% $100
I know, this is not a huge difference, right? But over 10 years, you have received $900 more by utilizing Bank B.
While you will have to pay more in taxes with Bank B, you will still come out well ahead. I encourage you to look at the current return on your savings account, then go here to compare it to other options available. You may be pleasantly surprised what this simple move can do to increase your earnings on the money you have already saved.
Roth IRA accounts have been available since 1997. In a traditional IRA, you contribute pretax dollars that grow tax deferred, but are taxable upon withdrawal. Roth IRAs are for after tax contributions that provide tax free growth and distributions upon retirement.
The magic of compounding means, the earlier you start, the greater the tax-free growth within the account. If you are 20 when you start making contributions, you could be looking at four doubles of your original contribution by the time you retire at age 60. That means a $5,500 contribution this year could grow to $88,000, allowing you to potentially create $82,500 of tax free income for your retirement years.
Another reason to open a Roth IRA is the flexibility it can provide to fund emergencies that may arise over your lifetime.
The Five-Year Rule
You can always withdraw any Roth IRA contributions without taxes, after all, you paid income tax on the money prior to making the contribution. However, if you haven’t had the Roth IRA open for at least five years, your distribution could still be subject to a 10% tax penalty, similar to the early withdrawal penalty for traditional IRAs.
The five years for withdrawals begins when you open the account, not when you make subsequent contributions. There is also a five-year rule for Roth IRA conversions that start in January of the year you make a conversion. This additional rule was enacted to prevent someone from using a Roth IRA conversion to avoid early distribution penalties from traditional IRA withdrawals.
Who qualifies for a Roth IRA
If you have a modified adjusted gross income of less than $116,000 and are single or less than $183,000 if married filing jointly, you can make Roth IRA contributions of 100% of your income up to $5,500 if younger than age 50 or $6,500 if age 50 or older.
Back-door Roth IRAs
Because there are no income limitations for converting traditional IRAs to a Roth IRA, many who are disqualified for income resort to the back-door method for funding a Roth IRA. This works because anyone may open and contribute to a non-deductible traditional IRA, even if you are covered by a qualified retirement plan.
Once the funds are deposited into the nondeductible traditional IRA, they can then be converted to a Roth IRA. This has the same net income tax effect as contributing directly to a Roth IRA.
The Early Bird Gets the Worm
Tax free growth and tax free distributions are very enticing especially for those with many years until retirement, so start today. The more time your account has to grow tax free, the better.
I often get the question of what to do with an old 401(k) or 403(b) sitting with a former employer. In short, there are only a few circumstances where you would want to leave it be, but in those circumstances it can be extremely advantageous to do so.
So, when should you leave the money in an old 401(k) or 403(b) rather than roll it over to an IRA?
Other than these scenarios, I recommend rolling over your nest egg to an IRA with a reputable fiduciary. Just some of the reasons are:
This is one of the walls in the reception area of my office. You can see I like to hang lots of little items there. The items were picked with some care, they are meant to convey to clients and prospective clients a sense of who I am and what I believe in. They are also there to remind me of what I aspire to. If you came to my office you would find that none of the items on the wall relate directly to money or wealth in the traditional way you might expect at an investment advisor’s office (though there are other places where you could find some of that).
The items on the wall are there to remind me that money is just something that allows us to live fuller lives. It is not a goal in and of itself. One of the plaques reads “Enjoy the little things in life because one day you will look back and realize they were the big things”. That is a reminder that everyday I have the chance to enjoy something. It may not be a big new shiny thing, but that is not important, what is important is for me to be mindful and grateful for all that comes my way.
One of the cards reads “You are what you eat…I need to eat a skinny person” That is there to remind me to have a sense of humor and to laugh once in a while. Life is meant to be fun.
Another reads “Success is getting what you want, happiness is wanting what you get” That’s a reminder that I am as wealthy as I allow myself to be, by being happy with what I have.
Maybe you have a wall of your own. Maybe it exists only in your head. What do you hang on your wall?
It is important to understand all the risk you face as an investor. Risk comes in many forms and some risks are higher than others at different stages of market cycles. Understanding the risks that could hurt you the most and how you can offset or reduce that risk is important to your long term success as an investor.
There is company specific risk. That is the risk that you will own a company like Enron or MCI or Kodak or any other of a myriad of companies that have fallen by the wayside. The cure for market risk is broad diversification. If your portfolio had a 1% exposure to Enron when they imploded it didn’t really hurt, the other 99% of your portfolio likely bailed you out. But if Enron was 20% or more of your portfolio it hurt a lot and took a long time to recover from.
There is interest rate risk. That is the risk that interest rates will rise. This is generally bad for dividend paying stocks, but is really, really bad for bonds, as bond prices fall when interest rates increase. I would venture that interest rate risk is higher in most portfolios today than at any time in the last 25 years.
There is inflation risk. The risk that the falling value of a currency will lead to lower purchasing power per unit of currency. Inflation is really bad for bond holder as they are repaid with currency that purchases less goods and services than the currency they originally loaned out. You can offset inflation risk to a degree by investing in inflation protected bonds or by investing in companies that pay dividends that go up over time.
There is political risk. That is risk that an act of the government could adversely affect an industry. Energy policy can mean millions of dollars of extra business for oil companies or millions of dollars of extra business for renewable energy firms. Tax policy can benefit some industries more than others. Political risk is hard to avoid because it changes so often and is so capricious in its implementation. Here, diversification is once again your friend.
Finally, there is obviously, market risk. Which is will the market prices of the securities you own go down in value over some arbitrary time frame. I say some arbitrary period of time because over the long run this risk has always disappeared. Over the last decade, we have seen markets go down by 50% or so, only to see them rebound by more than double that number. In your lifetime, you will likely see over two dozen times when stocks will retreat by at least 15%. Yet over your lifetime the stock market will almost certainly be a one-way street with the bias to the upside. Maybe we should call this the risk of missing out rather than market risk, because the fear of short term dips could prevent you from profiting from the permanent ups of stock ownership.
Understanding the risks you face and the ways you can offset that risk will help you become a better investor. Invest some time to contemplate the risks you are facing today.