Money Mommy

Stuff your mom should have taught you, but didn't…


Month: April 2016

Steps for New Parents

A new baby is a life changing event!  Have I stated the obvious? Your home will be one of upheaval when a new baby arrives.  Those idealic weeks of planning the nursery and imagining yourself holding a smiling baby will quickly give way to the reality of changing diapers, spitting up, sleepless nights, and a crying baby.  I’m here to tell you that it is all worth it!  I look back on those hectic early months and only remember snuggling my sweet babies in their little jammies and listening to their baby coos. It’s only when I actually skype with my sons and their new babies that I am reminded of the chaos that a baby can bring into a well ordered life.  My daughter-in-law put it very simply, “I knew it would be hard in the beginning, but no one told me how much I would really love having him.”

Along with setting up the nursery, daycare, feeding schedules, car seats, baby wardrobe etc comes some other very big responsibilities.  Don’t put these off.  In fact, you might just want to start them before baby even arrives.

First and foremost is your will.

Who will take care of your child/children should you pass away. Don’t be silly and put this off just because you can’t face the prospect of your own mortality.  Look at this as a gift to your child and the chosen guardian. I have been totally honored to be asked to step in as a guardian if the unthinkable happens for several different friends and family.  I am forever grateful that I never needed to fulfill this role.  But I did take special joy over the years watching these various children grow into adulthood.  Don’t be afraid to change the guardian in your wills as circumstances change: i.e., a move out of state, a change in child rearing philosophy, drifting apart from old friends.  I changed my will a few times as my children were growing up to ensure the best person for them at different stages of their lives.

When you choose your guardian, do not automatically list both halves of a couple.  If you want Aunt Jane, then just specify Aunt Jane.  Uncle Frank will be there too.  Given the crazy divorce rate, no one can guarantee that your sister or brother’s marriage will last forever.  You don’t want your child caught in the divorce settlement or being sent to live with an ex-partner that you haven’t seen in years.

Sometimes, the best guardian for your child’s physical and mental needs might not be the best one for their financial needs. You might consider a financial guardian, institution or a trust for this purpose.  At that point, you need to determine how much money will be made available for the ongoing care of your child and at what time all the funds would be made available to your child.  At 18? 21? All at once or slowly over time.  I recently did the taxes for a 65 year old woman.  She and her sister were each receiving $100 a month from her aunt’s estate for the past 40 years.  At one time, that was a lot of money.  Now it barely covered the groceries. Even after forty years have passed, they can’t change the trust.  So please, don’t try to control forever from the grave.

Now is a good time to review and update your beneficiaries.  Check your life insurance policies, your pensions, your 401 K’s, your IRA’s, your TOD accounts.  Make sure they go to the person you want.  The internet is full of stories of people who didn’t update their beneficiaries.  Upon their death these assets did not go to their family and loved ones.  Instead they went to an old grumpy uncle, a divorced spouse or a forgotten fling from thirty years ago.  It takes only a little time to protect your family by updating your beneficiaries.  Remember, whomever is listed as the beneficiary of these life insurances, pensions, IRA’s etc is the person who will actually get the money at the time of your death, regardless of what you might put in your will later.

This is also a good time to make sure you have ample life insurance to provide for your family.  Both parents should have adequate life insurance whether both work or not.  After all, the “bread earner” may bring home the bacon, but the stay-at-home parent provides the “daycare” and various other home duties that would otherwise have to be paid for.  Competent daycare can cost upwards of $1000 a month.  Consider term insurance which is substantially cheaper than whole life.  You will also want it for 20 – 30 years; longer if you plan on more than one child.  My own children are seven years apart.  When my eldest turned twenty, my youngest was still thirteen.  If my life insurance had ended after only 20 years, she would have had no financial net during all of her teen years.

You just had a baby.  Are you already thinking of saving for college?  Unless you have limitless funds, DO NOT INVEST in a 529!  I know, this is totally opposite of what most financial advisors tell you to do, but please listen to me.  Instead, you should contribute the maximum to your ROTH IRA.  As long as you are married and one of you has wages, both of you can have an IRA.  It is here that you will start saving for baby’s education.  This is such an important topic, that I have written a whole blog entry about it.  Meanwhile, trust me.  Start your IRA. Now.

While we’re on the subject of IRA’s and retirement income, make sure you are taking advantage of any employer sponsored 401K.  See my entry on starting 401K’s if you haven’t already begun one. Time goes fast when you have a little one.  Why it was just yesterday that you were carefree and attending high school or college, and now you have a whole new person depending on you.

Speaking of work related benefits, check out any maternity or paternity leave that might be offered by your employer. Be sure baby is added to your health insurance as soon as possible.  If you both are planning to return to work after baby and you need child care, consider signing up for your employer’s dependent care flexible spending plan.  You will not pay (and therefor will save!) taxes on money set aside and used for qualified daycare expenses. This works the same as flexible savings accounts for health care, another work related benefit you should consider using.

With all this financial talk, let’s not forget the baby! Ever! I’ve heard too many horror stories of children forgotten in a hot car.  Strap your purse, your briefcase, your lunchbox, whatever! in the back with your baby.  We might forget we were supposed to drop a sleeping baby off, but I don’t know too many who will forget their purse when they leave the car.  For the more technological, they even make gadgets that will beep if you get too far from a car seat.  Remember: Protect my grandbabies at all times!


401K “Let it be!”

Did you listen to me?

Did you start your 401K?


Now leave it alone!  No, I don’t mean the occasional rebalancing.  I mean the whole thing!  Leave it alone!

Nearly every year that I have prepared taxes, someone comes in with a decimated 401K. No, I’m not talking about a 401K that is riding the roller coaster of the market; I am talking about a 401K that has been purposely destroyed.  This is the account that was cashed out in one ill conceived moment.

Let’s review the attributes of the 401K.

It is first and foremost a retirement plan.  You are saving for your future self. With a little luck and a modest 6% return, it should double every twelve years.  That means that one thousand dollars (invested at 22) will turn into two thousand dollars by the time you turn 34; then four thousand dollars at age 46; eight thousand dollars at 58 and sixteen thousand dollars by the time you are 70 and ready to retire. Save two thousand dollars when you are 20, and you will have thirty-two thousand dollars at 70. Many companies will match whatever you are willing to invest in your own 401K.  So, if you save two thousand dollars in your 401K, your employer will place an additional two thousand dollars in your 401K.  Now you will have sixty-four thousand dollars at retirement, and all you had to do was save two thousand dollars in your 401K.

A 401K is designed to be used for retirement.  To encourage you to save, the federal government will NOT tax you on any money you put in your 401K.  This means that you will save $300 in taxes if you invest two thousand dollars in your 401K and you are in the 15% tax bracket.  Put another way, that sixty-four thousand dollar retirement only cost you one thousand seven hundred dollars.  If you are in the 25% tax bracket, you will have actually only spent one thousand five hundred dollars, since your taxes will be decreased by five hundred dollars. It is only when you retire and start using the 401K that you will pay taxes on this money. By then, your peak wage earning years will be over and you will probably be in a lower tax bracket. Until that future date you will not owe any tax money on your own contributions, your boss’s contributions, interest, dividends or any growth in your 401K.

So, we have a retirement plan with no tax liability until we take it out. Hopefully, we will be in a lower tax bracket when we take it out.  However, if we take it out BEFORE retirement age – usually 59 1/2 – there is a ten percent penalty on the money withdrawn early.  That doesn’t sound like much. IT IS!!!!

I have seen many naïve individuals in their peak earning years cash out their 401K’s early.  My last simpleton was 40 years old when he was laid off last year.  His severance package swelled his taxable income to nearly one hundred thousand dollars.  Then he decided to use his 401K to pay off his mortgage, so he cashed that out too.  With that decision, all of his 401K became taxable. Tacked onto his regular pay and severance package, the tax rate on his 401K  soared up to 28%.  An additional 10% was required to pay a penalty for early distribution.  With state taxes taking another bite, fully one third of his nest egg was used to pay taxes.

What should he have done?  Well, he used it to pay his mortgage off.  But, he could have tightened his belt and continued to make payments.  He could have taken the minimum necessary to survive from his 401K and allowed the balance to grow.  Assuming that he needed an additional one thousand dollars a month, he could have opted to only take twelve thousand dollars out last year.  The penalty would still be 10%, but the tax rate would have been lower, and he would have had time to find another job.  He could have opted to start taking annual payments from his 401K, generally known as a 72T to avoid any penalties.  (Google it if you are in these circumstances – Mommy)

My simpleton was 40. Last year, he had a 401K worth seventy-two thousand dollars.  By the age of sixty-six, assuming 6% growth, he would have had two hundred eighty-eight thousand dollars, over a quarter of a million dollars, to use during his retirement.  Instead he settled for just over fifty thousand dollars after taxes.