• Stephanie Bacak, CFP
Home / Think You Can’t Have a Roth?

Monthly Archives: October 2018

Why You Spend Too Much

Sure, there’s the rush of buying, but why?

It boils down to the Diderot Effect.

In 1763 philosopher Denis Diderot was paid a large sum of money for his library by Catherine the Great.

He purchased a luxurious robe which made him feel important.

Then everything else he owned seemed no longer good enough; he wanted more.

Which led to a crazy shopping spree and his being in debt, and even worse, he began to feel there was “no more beauty.”

He went from being in control and owning his possessions, to his possessions ruling him.

This happens all the time. 

You decide it’s time for a new shoes and you leave the shops with shoes, a purse, a wallet, and maybe a new dress.

Or you decide to go on a weekend trip and buy walking shoes, new clothes and matching luggage. 

Both parts of the Diderot Effect just got you – first, as a person that is worth a weekend trip, you are also worthy of new things to wear (plus imagine the pics); and second, once you spend, then you continue spending. 

Like potato chips, you can’t eat just one.

What can you do?

1. Like any addiction, the first step is awareness. Own that it happens to you or it will continue to own you.

2. Avoid shopping as entertainment.

3. Write a shopping list and stick to it. Before you shop, reflect of why you want to buy each item.  Because my son outgrew his pants – great reason. Because deep down, I want people to be impressed with my new stuff – harmful.

4. Stuff doesn’t create happiness in life.  People in impoverished countries experience as much joy as we do.

5. Have a plan for the bigger picture you truly want such as your child’s college education, retirement, the peace of not having debt…

When you focus on the big things you really want, the constant “need to buy” fades.

Budgets are hard for most people to follow, so my clients and I find it more effective to pick a savings number and pay that like any other bill and you will quickly adjust your spending.

Read More

How to Best Use Your 529 when Paying for College

If you have accumulated fund in your child’s 529, congratulations!

You are probably a member of the elusive Savers who plan ahead and hate debt. A savers’ immediate instinct is to use all the designated savings upfront, while the best scenario looks at all options.

The first step is weighing the college choice into the cost, that’s a topic we’ll discuss at a later time in great detail.

Once committed to a college it’s time to switch from putting money into the 529 to paying cash directly to the college.  I have an exact cut-off time for each client based on their personal situation.   We need funds outside a 529 to make four annual direct payments of up to $4,000 to allow you to take AOTC for 4 years for each student (Married Filing Jointly phaseout at $160,000 MAGI) and receive a tax credit of $2,500 each year.

Then take approximately 1/4 of the 529 plan.  As your approach college your 529 investments should have been invested more conservatively, you don’t want to have to spend a substantial amount of the account in a year that the market is down.

Finally, consider a Stafford loan which is has some added benefits over private loans but have an annually increasing amount you could borrow.  So if you need to borrow the full amount available, you have to start with $5,500 the freshman year.  These loans can be reasonably paid off, additional private loans have created the student loan crisis. Loans are a last resort so all other options are weighed in first.

Considering using your Roth?  I advise against sacrificing your retirement for college expenses but if the Roth has been held 5 years you have reasonable options here.

Graduate students have different options than undergrad and many parents rightfully feel that the student should pay their way here.

Read More

Smart Money Couples Don’t Wait for January

Marriage is about moving toward a common goal, so you better set some.  I strive to help clients grow together and with a happy retirement in mind.  My part is calculating the numbers and using that shoebox full of old statements to create a picture so informed decisions are possible.  The below are things you can do to grow (wealthy) together:
1. Dream together – set big and small goals and start imaging how you want life to be. Ever create a dream board?  Great activity for the family, instead of saying “I want to travel the world” or “have a sailboat”.  Find a picture of a couple drifting into the tangerine sunset on on a catamaran with the sails full of wind.
2. Plan together – once you have goals, work backwards to figure out what that requires today and every day.  Don’t guess, write it down and add it up.  Some goals have to be adjusted and sometimes, I help clients turn the knob a little on what they are committed to doing today or whatever it takes to bring dreams and realities in line with each other.
3. Start from scratch – the best budget planning is when you consider what if I could make this line item zero (0).  True this doesn’t work for everything but go ahead and look at everything you spend money on and ask Why? and Is this worth my life energy?  Or even if it sparks joy in your life.
4. Create rules together – Easier than a monthly budget is to take step #3 to determine what dollar amount of percentage of income is going to debt pay down or retirement or other goals each month. Review monthly to stay on track.
5.Fun money – having cash each month that is each of yours for eating lunch or entertainment or whatever.   This equals things out because you may prefer lunch out while your spouse may bring lunch and get a massage once a month.
6. Plan a vacation – plan way in advance because the most pleasure is from looking forward to the trip.  And get deals!   Rewards within your budget are good for you and your relationship.
7. Sleep tight – make certain your spouse is covered (and not in debt) if something should happen to you.
8. Contribute to retirement – you are going to share the money when you retire, so motivation one another to put it away today.  There is more than one way to save for retirement and you need to be diversified in investments and tax vehicles.
Get ready for your next 12 months and 20 years now!

Read More

No More Tax-Free Lunch?

Business Owners, this is not a happy part of the Tax Cuts and Jobs Act changes.

We have lost the Entertainment 50% deduction. But for now meals remain a deduction (aka a write off). Taking a client or prospect out to lunch has been ruled a 50% deduction but we almost lost that too.  No deduction for tickets you might gift, not for rounds of golf, and not for social/recreational memberships.

You can write off any of these expenses provided for employees IF it is treated as compensation to the employee – meaning taxed on their W-2 as additional income.  Company holiday party or picnic for every employee is still a full deduction.  And if you hold events where a meal is included in the price the client pays (Cost of Goods Sold) that remains a full write off.

Travel meals remain a 50% write off and feeding your staff in house so they can work through lunch or have in house education is also a 50% deduction.

Just know your new rules and consult with a tax professional and planner to make great decisions.


Read More

Increased Contribution Limits Announced

The IRS just announced increased contribution limits for IRAs and many retirement plans. IRAs now have a $6000 limit, 401(k) $19,000 on the employee side, and SEPs $56,000 limit.

This is another win for investors and savers in a year where so many tax laws have changed. The new maximum contribution is the amount you can choose to add to your IRA (if you qualify) or 401(k) or SEP pre-tax and it will grow in these accounts tax-deferred until you take it out during retirement.

It may seem like normal course of annual updates but this is the first increase in IRA contributions since they set at $5500 in 2013 (and contribution limits were stuck from 1982 to 2001 at just $20000. For so long there were really no cost of living increases in the IRA and Qualified plan contribution limits so it a great opportunity for so many to be more prepared for retirement.

Read More

Think You Can’t Have a Roth?

Good News!  While the Tax Cuts and Jobs Act of 2017 reads as though the backdoor Roth is dead, never fear!

A Roth IRA isn’t perfect for everyone, it certainly gives a unique opportunity to have assets that grow tax free and can be distributed in retirement tax free.  You forego a tax break in the current year and have a few rules applied but the pay off can be tremendous.

If you are not familiar with BackDoor Roth, it is simply contributing funds to a non-deductible IRA then in the same year or immediately, converting those funds to a Roth.  If they had time to grow then you would pay a tax on that grow.

The new tax laws prohibit recharacterizing your Roth conversion (mouthful right?). That means once your convert an IRA that creates a tax issue for you, you can no longer undue the conversion to a Roth.  So if you have an IRA that has been growing for years, consult with your tax preparer about the potential tax of you converting before you do it.

Not only is the backdoor Roth not going away, the tax-related Congressional committee has said the backdoor Roths are legitimate.  Congress doesn’t have final say over IRS rulings but there are no statutes to the contrary.


Read More