My wife and I are expecting our first child.  With all of the excitement and planning of setting up the nursery and getting the crib and diapers, one equally important piece of planning is beginning the baby’s college savings.  There are several different options when saving for college, so we wanted to make sure that we decided on the right option for us and our child.  We discussed different options, advantages, and disadvantages on our evening walks together to decide the best option for us.  With the average price of college already at $25,000+ per year and rising, we feel it is important to get started as soon as we can.

529 Plans: One of the most common types of saving accounts for college is the 529 plan. This account has the tax advantage that all earnings are tax-exempt if the funds are used for qualified education expenses.  Those qualified expenses include tuition, room, board, computers, and up to $10,000 in K-12 tuition.  They can also be used for student loan payments and apprenticeship programs. A 529 plan works great if you plan for your child to attend postsecondary schooling or plan to use the funds for K-12 tuition.  The funds can even be transferred to another qualifying family member such as a sibling or cousin if they aren’t used by the intended child.  A potential drawback of the 529 plan is that earnings could be taxable and have a 10% penalty applied if withdrawals are not used for qualified education expenses. Another advantage is only 5.64% of parent-owned accounts are counted as assets of the student, so this account type may be more beneficial to help the student in qualifying for financial aid.  If pursuing a 529 plan, it is just as important not to overfund as it is underfund to avoid the 10% penalty.  However, with planning, the 529 plan can be an excellent tool for education funding.

UTMA Accounts: Another popular option is the Uniform Transfer to Minors (UTMA) account.  If you don’t like the potential penalty in a 529 plan account and want more flexibility on how the funds can be spent without worrying about that penalty, this can be another great option.  An UTMA account allows you to save money in an account in your child’s name, with the funds controlled by a custodian and used for their benefit while they are a minor.  Once they reach the age of majority, between 18 and 21 (age 21 for UTMA’s in Texas), the funds are then transferred to the child to use at their discretion.  One obvious drawback of this type of account is that a child might not use those funds responsibly at such a young age.  Another concern is that for financial aid, this type of account is treated as the child’s funds, which is not as beneficial as a 529 plan where only 5.64% of the account is counted.  Finally, this type of account is not tax deferred, so tax is paid on earnings as they are incurred.  Earnings beyond $2,200 per year are also taxed at the parent’s tax rates through the “kiddie tax”.  Smaller UTMA balances may not generate enough earnings to owe any tax, but as the balance grows and earnings increase beyond the $2,200 each year, some tax may be owed on the earnings.

Both 529 Plans and UTMA accounts are good options to use to save for a child’s college.  The average tuition is currently over $25,000 per year for an in-state student attending a public 4-year institution, which amounts to over $100,000 for a 4-year degree.  With education costs rising at nearly 8% per year, it is important to start planning early for college savings. Reach out to a CERTIFIED FINANCIAL PLANNER™ Professional to help reach your education funding goals.

Published in the Victoria Advocate

David Faskas is a CFA and CFP® Professional with KMH Wealth Management, LLC. He specializes in investments and portfolio management.  He is the Chief Investment Officer, Chief Financial Planning Officer, and a managing member of the firm.

Does retirement seem like a distant, imaginary land to you? Possibly a goal that seems far out of reach? Beware – one day, out of nowhere, you will have made it to the “Promised Land” of retirement. For some this is planned, for some this is forced, and for some retirement is a spur-of-the-moment decision. For those who have planned for retirement, hopefully, this new stage of life contains a limited amount of unknown and undesirable surprises. But for the ones taken more by surprise…what now?

First, if you do not currently have either, find a CFP® professional and a CPA that you can feel comfortable helping you to navigate or plan for this new territory. Both credentialed professionals are held to their respective boards’ highest standards of ethics and professionalism. A CFP® professional has completed the required coursework, satisfied the experience requirements and maintains the proper education requirements to help people plan financially for all life stages. A CPA can help unwind all of the interwoven tax laws and regulations that someone may be burdened with in retirement.

Next, along with your CFP® Professional and CPA, review all of your retirement vehicles you have built over your lifetime. These will include such things as 401(k) accounts, IRAs, pension plans, annuities investment accounts, investment properties, Social Security benefits, savings, etc. Each one of the before-mentioned vehicles has its own tax conditions. Pulling a needed amount of money to live from one vehicle versus another could have a detrimental effect on the longevity of your retirement funds. Some of the vehicles are taxed at ordinary income rates (currently as high as 37%), others could be taxed at long-term capital gains rates (currently as high as 20%) and some could be completely tax-free.

Vehicles taxed at ordinary income rates include Traditional 401(k) accounts, Traditional IRA accounts, and most pension plans. Roth 401(k) accounts and Roth IRA accounts that were contributed to with after-tax dollars, were able to grow tax-free and can be withdrawn tax-free (as long as all requirements are properly met). Investment accounts provide a hybrid of tax rates. Interest, non-qualified dividends, and short-term gains will be taxed at a higher ordinary income rate, while qualified dividends and long-term gains will be taxed at a lower capital gains rate. Social Security benefits may be completely tax-free if your taxable income is below a certain limit, or as much as 85% of your Social Security benefit could be taxed at ordinary income rates. Investment properties, including rental homes, vacation homes, commercial properties, etc., are treated as passive-income (for the most part) and profit will be taxed at ordinary income rates. The sales of investment properties held more than one year will be treated as capital income and taxed at lower capital gains rates. Return of capital or basis of an investment property will not be taxed.

As you can see, there are various ways your retirement needs may be funded. It is crucial to build your team of financial professionals to help build your retirement portfolio now rather than later. It is just as important to fund the proper retirement vehicle while working as it is to withdraw funds from the right one in retirement.

Published in the Victoria Advocate

Adam H. Baucom CPA/CFP® is a Senior Tax Manager for Keller & Associates CPAs, PLLC. He has over 10 years of experience in tax planning, tax return preparation and accounting.

Springtime is often associated with new beginnings like planning this year’s vegetable garden or opening day of baseball season for hundreds of Little Leaguers. After a long winter, we are anxious to get out and enjoy this time of year. Another common project is to spring clean your home. Your cleaning checklist may include dusting your ceilings fans, washing baseboards, or changing batteries in your smoke detectors. Spring is also an ideal time to spruce up your finances and below is a sample checklist of items to consider.

1. File your taxes on time. There are many benefits to filing on time including faster refunds, helping to prevent tax-related identity theft, and having more time to prepare to pay a balance due. Additionally, you will need a completed tax return to assist with items like obtaining a mortgage or applying for financial aid for college. Lastly, a completed tax return will give you the time to begin to proactively engage in tax planning for the current year.
2. Consolidate old retirement accounts. Gather up your investment statements and determine if there’s an opportunity to consolidate some of your accounts. Perhaps you have a 401(k) plan from a previous employer or two. You could consider combining these by rolling the accounts into a Rollover IRA. Another possible opportunity is to consult a tax professional to determine if these old retirement accounts are eligible for a Roth conversion and whether or not that would be appropriate for your circumstances.
3. Automate your savings. Establishing an emergency fund and investing for retirement are two cornerstones of most financial plans. Funding both of these goals regularly will put you on the road to long-term financial success. Easy ways to automate these are having deductions happen automatically from your paycheck. You will also want to double-check to make sure you are maximizing your investment savings by utilizing any company match for your retirement plan.
4. Organize and digitize important documents. Having trouble locating a copy of your will or a deed to a piece of property you might own? Consider organizing these documents and getting them into a digital format for further safekeeping. For those who may be leery about digital files, you may also consider a safe deposit box at your local bank.

The above are easy examples of basic financial spring cleaning items to consider. Perhaps the thought of this is overwhelming or you would rather spend your time doing other things. Consider hiring a CFP® professional to help streamline your finances and keep you on track with meeting your financial goals.

Published in the Victoria Advocate

Kyle W. Noack CPA/CFP® is Chief Financial Officer for Keller & Associates CPAs, PLLC and KMH Wealth Management, LLC.

The Texas snow storm of 2021 was a harsh reminder of just how unpredictable and unforgiving Mother Nature can be. We can do everything possible to protect our families and our homesteads against perils, yet the truth of the matter is that some things are just out of our control.

Fortunately, the list of perils covered in most home insurance policies is actually pretty broad. Standard home insurance policies normally cover roof damage and damages caused by burst or ruptured pipes. Most policies even cover damages or losses incurred due to power failures, which means your freezer full of spoiled food is probably covered up to a certain amount. You likely even have coverage to help pay for living expenses while your house is uninhabitable. Those expenses can include rent, hotel stays, restaurant meals, storage fees and more. However, as a homeowner you have the responsibility to take reasonable steps to avoid perils. If your 40 year old roof collapsed, yet there are visible signs of structural decay and wind damage from years prior, your claim for the winter storm may be denied since you should have replaced your roof years ago.

So, what can you do now?

First, contact your insurance agent if you haven’t already. If the cost to repair damages exceeds your deductible, then your agent can get you started in filing a claim. He or she may also request specific photos and documents before you begin making repairs.

Second, if you need to hire a professional for repairs, don’t hire just anyone. Be wary of imposters by requesting a certificate of insurance. Contact the insurance company on the certificate to verify the contractor’s coverage is active. It is not out of the ordinary for fake or unlicensed contractors to provide outdated documents. Your insurance agent may even require a copy of your contractor’s certificate of insurance. Document all of your expenses by keeping receipts and make a file of any major home repairs. Maintaining records supporting your responsibility as a homeowner will be an asset in helping you get future claims approved.

Lastly, review your insurance policies. Make sure you understand all the coverages on your policies and have a good grasp of the exclusions. Is your deductible way too high? Or are you under-insured or over-insured? A CERTIFIED FINANCIAL PLANNER™ professional is a great ally to help you in reviewing your insurance policies. A CFP® professional regularly works alongside other professionals, like accountants, attorneys, and insurance agents, to help you make financial decisions that are in your best interest. Though not insurance agents, CFP® professionals are highly educated in insurance and can help you determine if a specific policy is consistent with your financial plan. If you don’t have a financial plan, you can go to https://www.letsmakeaplan.org/ to find a CFP® professional near you.

Published in the Victoria Advocate

Hannah Gohmert is a CERTIFIED FINANCIAL PLANNER™ professional and the Chief Compliance Officer of KMH Wealth Management, LLC.

What if I told you that I could put your money in an investment that would offer guaranteed losses of only 2 percent every year, and you could have complete comfort and security in the fact that you know how much you are guaranteed to lose.  You would probably laugh at such a ridiculous proposal.  Would you consider an investment that is guaranteeing you a loss every year a safe or good investment?  Probably not.

The reality is, this investment is not only real but it is used every day.  Cash and money market investments are often thought to be among the most secure investments that exist.  While this may be true on short time scales when your timeframe is expanded to years or decades, the sense of what is risky and what is safe changes dramatically.

As an example, one of the largest money market funds, the Vanguard Federal Money Market Fund, is yielding three-hundredths of a percent at the time I write this.  An investment of one hundred thousand dollars would only offer a $30 return per year.  This may be fine, however, there is a very real loss that you won’t see on your monthly statement – the loss from inflation.

Inflation is what caused the price of gas to rise from $1.50 per gallon in 2000 to $2.60 now, the price of a $1,510 new car in 1950 to cost $37,800 in 2020, and what increased the price of rent from $300 in 1984 to $1,000 per month today.  Inflation erodes how much you can purchase with your dollars.  At a 2% inflation rate, a $100,000 money market fund would lose $2,000 in purchasing power after one year, far outstripping the $30 interest earned.

Inflation is an ever-present force that will reduce the value of money over time.  This is difficult to see over short time frames, but over years it becomes significant and undeniable, like a river slowly cutting through a canyon, year after year.  Over the past 100 years, the U.S. Bureau of Labor Statistics shows that inflation has eroded 92% of the value of a dollar since 1920.

As contrast, some think of investing in the stock market as a roller coaster or gambling.  In a short time frame of one or a few years, this may be how it feels.  However, when your time horizon expands, so does the narrative.  The worst 20-year period in U.S. stocks began in 1949, and only delivered a compound annual return of 1.2% per year.  The best 20 years began in 2000, and delivered a compound annual return of 18.4%.  The U.S. stock market has not had a recorded 20-year period with a loss – ever.  As your investment time horizon expands, the risk of loss in the stock market declines.

Cash, money market, and similar investments that return below the inflation rate over time may offer a short-term comfort in knowing that your dollars are safe and secure, but your value may not be.  Over longer time frames, cash and money market funds can risk loss to inflation and investing some funds in the stock market may be necessary to maintain your purchasing power.  Consider your time horizon and risk tolerance when investing in anything, even in cash, and consult a CERTIFIED FINANCIAL PLANNER™ Professional to help you decide on the right investment allocation for you.

Published in the Victoria Advocate

David Faskas is a CFA and CFP^® Professional with KMH Wealth Management, LLC. He has been with the firm for over eight years and specializes in investments and portfolio management.  He is the Chief Investment Officer, Chief Financial Planning Officer, and a managing partner in the firm.