Solid Investing and Financial Strategies. For 2015 and Beyond

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1 Solid Investing and Financial Strategies For 2015 and Beyond 1

2 Understand Your Profit and Loss I. INCOME STATEMENT(Profit and Loss) II. FOR: ID#: FROM: TO: INCOME: Gross Receipts or Sales... $ GROSS PROFIT... $ Other Income... _ GROSS INCOME... $ III. IV. EXPENSES: V. Advertising... $ Rent (Other)... $ Amortization... Repairs... Contract Labor... Supplies... Car & Truck Expenses... Taxes... Cleaning & Maintenance... Travel... Commissions... Meals/Ent (50%)... Depreciation & Sect Utilities... Employee Benefits... Telephone... Freight... Wages... Insurance... Interest (Mortgage)... Interest (Other)... Legal & Professional... Office Expense... Pension/Profit Sharing... Rent (Machinery/Equip)... TOTAL EXPENSES... $ NET PROFIT OR LOSS... $ 2

3 Put more of your hard earned money away for later INCREASE IN RETIREMENT PLAN CONTRIBUTION LIMITS The limits on contributions to retirement plans are increased as shown on the following table. Retirement Plan Contribution Limits Year IRA Simple 401(k) Def Cont SEP % of Profit /25 Catch-up Contributions for individuals 50 years or older for certain Plans: IRA or ROTH IRA $1,000 SIMPLE PLANS $2, (k) $6,000 Note: The SEP IRA does not allow catch-up contributions 3

4 The 401(k) series A good way to increase retirement plan contributions on lower levels of profit. (or S Corporation Salaries) Must be started by end of first year, you can t wait until the following year to set up like a SEP IRA Only problem is that if a self employed person is not maximizing contributions to their current retirement plan, they won t do it to the 401(k) either The 401(k) series Solo (k) or Safe Harbor 401(k) Profit $50,000 $80,000 $220,000 Cont: $18,000 $18,000 $18, % 12,500 20,000 35,000* =401(k) $30,500 $38,000 $53,000 If 50+ $36,500 $44,000 $59,000 vs SEP $10-12K $16-20K $50,000 4

5 Roth 401(k) NOT SUBJECT TO INCOME LIMITS OF ROTH IRA Not Tax Deductible, but distributions are generally tax free 401K Loans available Maximum deferral per employee will be $118,000 year OR $24,000/year for age 50+ Maximum contribution from employer is 25% of employees compensation. Combined contribution between employer and employee not to exceed $53,000/year (2015) 5

6 Consider Purchasing Investment Real Estate in this market The IDEAL Formula I D E A L Income from Cash Flows Depreciation Deductions Equity Buildup Appreciation Leverage Case Study : Purchasing Rental Property You are looking at purchasing a 2-unit building but know that you must look at the numbers before you make your decision. Please use the following information to determine the first-year benefits of owning this rental property. Purchase price: $90,000 Down payment: $18,000 Financing: $72,000@ 4.5% year) Rent: Unit 1 - rents for $625 per month Unit 2 - rents for $575 per month Vacancy rate (projected): 5% Land value: 15% of purchase price Personal property value: 10% of purchase price Building value: 75% of purchase price Building expenses Insurance: $375 Real estate taxes: $2,600 Repairs and maintenance: $800 Utilities: Tenant pays all except water Advertising: $240 Miscellaneous: $250 First year's interest on loan: $4,320 Investor's tax bracket 35% Purchase date: January Projected appreciation: 4% 6

7 Investment Property Worksheet This form is designed to estimate the first year's benefits of the real estate investment. It does not consider the effect of selling or exchanging the property in the future. It is not a substitute for legal or tax advice. If legal advice, tax advice or other expert assistance is required, the services of a competent professional should be sought.. PROPERTY INFORMATION Purchase cost $ Cash invested $ Financing Loan amt. $ Rate P&I Loan amt. $ Rate P&I Land value $ Personal property value $ x % $ Building value $ x % $ Total depreciation $ Annual rent $ Less vacancy $ Gross operating income $ = Depreciation: Real estate tax $ Supplies $ Repairs $ Landscaping $ Management $ Association dues $ Insurance $ Miscellaneous $ Utilities $ Total annual operating expenses $ ANALYZING THE BENEFITS 1. Gross operating income $ Minus: operating expenses - $ Equals: net operating income = $ Minus: annual debt service (monthly - $ P.I. x 12) Equals: cash flow before tax = $ 2. Annual debt service (P.I. x 12) $ Minus: interest - $ Equals: principal reduction = $ 3. Net operating income $ Minus: interest - $ Minus: total depreciation - $ Equals: taxable income = $ Times: tax bracket x % Equals: tax paid or saved = $ 4. Appreciation (estimate %) $ ANALYZING RATES OF RETURNS Return on investment with appreciation Cash flow before tax + principal reduction + tax saved/paid + appreciation Cash invested = % Return on investment without appreciation Cash flow before tax + principal reduction + tax saved/paid Cash invested = % 7

8 The Health Savings Account (HSA) A. What is an HSA? 1. An HSA is an innovative approach to health insurance signed into law in December of 2003, made available January 1st An HSA plan has 2 components: a. A qualified high deductible health insurance plan b. An Individual Tax-exempt Trust (savings/investments) B. Why an HSA? 1. To combat the rising cost of healthcare 2. Recent trends in cost- shifting from employers to employees is noticeable, and has employees vested in finding a solution to the problem 3. To make the healthcare system cost-efficient by reducing the subsidies inherent in a third-party payment system 4. Reward individuals that efficiently manage their healthcare dollars 5. Desire for individuals to take more control over HOW medical dollars are spent 6. Provide a lifetime savings vehicle for medical expenses 7. Individuals want to have more control over their financial destiny 8. With a an HSA, Health insurance plans start looking AND COSTING like other types of insurance i.e. auto, homeowners C. Who is eligible for an HSA? 8

9 1. An individual needs to be covered by a QUALIFIED high-deductible health plan to set up a Health Savings Account 2. In addition, individuals cannot be: a. covered by a health plan that is not a qualified high-deductible plan b. claimed as a dependent on someone else s tax return c. entitled to Medicare benefits (age 65 or older) Note: A spouse can have single coverage under an HSA, if they are not covered under the other spouses plan. The account however, is for the individual covered under the HSA qualified plan only. 3. HSA rules are determined at the federal level. Individuals may be eligible under state guidelines (domestic partners, civil unions etc.) for qualifiedhealth insurance coverage, BUT not eligible to open the savings account portion of the plan. D. Is an HSA right for everyone? 1. No. While many people will benefit from the creation of HSA s; individual insurance alternatives, situations and personal preferences will determine if it is the right type of coverage. Individuals that HSA s will benefit most are people that save money on premiums from other insurance alternatives, and that will systematically fund the savings account. 2. A good starting point is to look at recent years medical spending, and calculate the total dollar amount that would have been spent on premiums and medical expenses under terms of the HSA qualified plan. Compare it to the actual amount spent in the same period for insurance premiums, copays and co-insurance. HSAs (Health Savings Accounts): HSAs were enacted as part of the Medicare Bill in late These types of accounts were looked on favorably as a more liberalized version of the MSA. HSAs allow anyone under the age of 65 who enrolls in a high deductible health plan to contribute amounts up to certain limitations, which change every year. The current dollar minimums / limitations for 2015 are: 9

10 Individual Family Minimum required health plan deductible $1,300 $2,600 Maximum allowed health plan deductible $6,450 $12,900 Maximum allowed out-of-pocket limit $6,450 $12,900 Contribution Limit $3,350 $6,650 Additional contribution for individuals age $1,000 $2,000 Note: The real benefit of HSA is threefold. 1. The plans allow the participant(s) to lower their monthly medical premium costs by raising the annual deductible. Of course, the flip side of this is that the participant(s) are exposed to more medical expenses paid out of their own pockets before the insurance kicks in. 2. The plans allow the participant(s) to contribute, tax deductible, fairly significant amounts annually to their HSA. 3. Any funds withdrawn to pay for qualified medical expenses are tax-free. 10

11 INVEST IN THE EDUCATION OF YOUR CHILDREN, GRANDCHILDREN OR? 529 COLLEGE SAVINGS PLANS What is a 529 Plan? It is an education savings plan operated by a state or educational institution designed to help families set aside funds for college costs 529 Plans are usually categorized as either prepaid or savings, or some element of both Every state now has at least one 529 plan available What is so great about 529 Plans? 1. Unsurpassed income tax breaks 2. You (the donor) stay in control of the account 3. Hands off easy way to save for college 4. Everyone is eligible to take advantage of a 529 Plan 5. Amounts donor can contribute are substantial 11

12 CONSIDER THE REAL ESTATE IRA A. Introduction This opportunity is legal although few professionals really understand the details. This opportunity is very complex, although after you have done it once, the process does not seem that difficult. This opportunity is like a ladder, at the first rung, everyone can quickly grasp the details, but as you climb the ladder, the higher rungs become much more difficult to both understand and to implement. I have used the phrase, Many are called but few are chosen to emphasize that while many, many, many real estate agents get very excited about the possibilities of this investment, if 10% of them actually follow up and make the investment I would be surprised. B. Terminology 1. The ability to purchase real estate in a retirement plan includes ALL retirement plans. This means that the following retirement plans can own real estate properties. a. IRA b. ROTH IRA c. SEP (Simplified Employee Pension) d. 401(k) e. Profit sharing plan f. Money purchase plan g. Defined benefit plan Custodian or Trustee-A custodian or trustee is required for all individual account arrangements. These two terms are synonymous. A custodian or trustee must be a bank, federally insured credit union, savings and loan institution, or other entity approved by the IRS to act as trustee or custodian. An individual cannot qualify as trustee or custodian. The trustee or custodian is the entity which is responsible for receiving and holding contributions and plan assets; maintaining accurate records of contributions, earnings, distributions, and other relevant records; making distributions to beneficiaries, and providing annual statements to account holders. The most commonly used name for these custodians or trustees is SPECIAL ASSET TRUSTEE, and the 5 better known SAT s are: a. Equity Trust, Elyria, OH b. Entrust, Oakland, CA 12

13 C. Advantages c. Fiserve, Denver, CO d. Pensco e. Sterling Trust, Waco, TX Among the most obvious advantages of investing retirement plan assets in real estate properties are: 1. Income tax (Federal and State) deferral. Keeping the money that would otherwise be paid in taxes in the investment 2. Investing in what you know as opposed to conventional investment vehicles such as stocks, bonds, and mutual funds that you may not understand as well 3. Investing in what you can control 4. If a ROTH IRA is used to own the real estate properties, the opportunity for tax-free profits, as opposed to tax deferred profits is available D. Disadvantages Not all is a bed of roses with this investment alternative. The following list provides reasons why you should not consider the Real Estate IRA. 1. The federal income tax rates, both marginal and capital gains rates, have never been lower. So paying your taxes now, (owning the property outside of your retirement plan) may be a wise decision. 2. Any tax write-offs attributable to the rental property owned by the retirement plan are not deductible 3. Complexity, complexity, complexity!!!!! 4. Finding professional advisors that know what they are doing 5. Avoid Prohibited Transactions!!!! These are: a. Personally borrowing money from your retirement plan b. Selling property to your retirement plan c. Receiving unreasonable compensation for managing the property d. Using the retirement plan as a security for a loan e. Purchasing property for personal use with your retirement plan funds 13

14 And do not forget to include Social Security Benefits into your Financial Planning Social Security Strategies Until recently, the conventional wisdom was that total lifetime benefits for someone with average life expectancy would be the same whether the beneficiary took a smaller benefit at 62 or a larger benefit at 70. But a growing body of research shows that, even when one's life span is shorter than average, it may pay to delay for at least a couple of years past the early retirement age of 62. For most married couples, for instance, delaying benefits until 70 for at least the higher earner is a no-brainer. By coordinating the dates they each claim benefits to take maximum advantage of spousal and survivor benefits, a husband and wife can boost lifetime benefits by hundreds of thousands of dollars. Before you can make your own calculations, you need to understand the basics. If you were born between 1943 and 1954, you can collect your "primary insurance amount" at age 66. The full retirement age gradually rises to 67 for those born between 1955 and 1960, but for this discussion we'll assume 66 is the full retirement age. You can start claiming at 62, but your benefit will be permanently reduced by a fraction of a percent for each month you claim before your full retirement age. Claim at 62, and your benefits will be cut 25% compared with what you would receive if you claim at 66. You get a delayed retirement credit of 8% for each year you wait to claim past your full retirement age until 70. Say you're due $2,000 at your full retirement age of 66. If you claim at 62, you will get $1,500. Wait until 70, and your benefit jumps to $2, % more than the take-it-early benefit. (And that doesn't include the cost-of-living increases that add to the benefit while you wait.) If you're married and your primary insurance amount is less than your spouse's, you can claim either a benefit on your own record or a "spousal" benefit. If the lower earner first claims at full retirement age, the spousal benefit is 50% of the other spouse's primary insurance amount. The lower earner can't claim a spousal benefit until the other spouse files for his benefit. Actually, a spousal benefit is two benefits: the lower earner's own benefit plus a supplement so that the total received equals up to one-half of the higher earner's benefit. Here's an example: Chris and Kay are the same age. Chris is eligible for a full benefit of $2,000, while Kay qualifies for her own $600 benefit. After subtracting Kay's full benefit from one-half of Chris' $2,000 benefit, she's eligible for a $400 spousal benefit. If they both file at 66, she gets her $600 plus the $400 spousal amount. 14

15 The size of Kay's total benefit will be reduced if she files for her own benefit earlier. Say Chris waits until 66 to file for his full $2,000 benefit. In the meantime, at 62, Kay files for her own benefit, which is reduced by 25% -- to $450. When Chris files, Kay will get her $400 spousal benefit -- for a total of $850 a month. Strategies for the Married Strategies for Singles Strategies for Widows/Widowers 15