Let’s Talk About Living with Student Loans

Let’s Talk About Living with Student Loans

 

Let’s Talk About Living with Student Loans

I have more student loan debt than I care to admit. But it was my decision, and I own it.

 

There’s been a lot of chatter in the news lately about student loan debt. With the total U.S. student loan debt reaching $1.75 million (mine included), the calls to forgive student loan debt have reached a crescendo—as if, if we scream it loud enough, the debt will just disappear into the ether. Removing the prospect of a presidential magic wand making it go away, the real question now is this: how do you save for the future, pay down your debt, and live fully?

I often read news articles detailing the hardship new graduates face when they struggle to pay down their loans and subsidize their lifestyles. I see a lot of finger-pointing toward a rigged system, corporations underpaying, or the predatory nature of lending. This isn’t to dismiss legitimate concerns of these institutions, but too often, I see a lack of personal agency. Behind some news articles, you find the subject of the article owns a Mercedes or rents an apartment that their social status dictates they should have but not the one their wallet demands. Take a step back.

Can you answer “yes” to these questions?

  • I know exactly how much money I’ll have at the end of the month.
  • I do not live paycheck to paycheck.
  • I can pay my bills and still save for wish list items.

If you answered “no” to any of those questions, it’s time to look at your current lifestyle. There’s an emotional component to finance that we often overlook. For many of us, our relationship with money becomes a reflection of who we are as a person. No one proudly admits they spend $150 on brunch a month. And no one boasts about their tendency to avoid their bank accounts out of fear of what the balance will be. After college, I had a coming-to-Jesus moment when I decided that to live my life fully, I needed to be the one who dictated where each and every dollar went. Enter zero-based budgeting.

If you’re not familiar with it, zero-based budgeting requires you to assign each and every dollar of your paycheck to a job. By assigning each dollar, it exposes your spending habits and tallies all the dollars and cents that have a sneaking tendency to add up well beyond your expectation. You must decide, “Do I need to budget $100 on Uber rides? I’d rather apply it to something else more important.” There is a mental calculation and trade off that must occur for you to affirm how your money is spent. There are several apps you can find to assist with this, such as You Need a Budget (YNAB) and EveryDollar. Having done this myself for a while now, I have found significant savings that I use to apply toward next month’s bills, thus providing me a safe buffer should I run into emergency expenses. I cook meals at home, and now suddenly I have $150 to allocate how I want (hello, Hawaii fund!).

Here’s the point: budgeting every dollar sets you free. It sounds counter-intuitive, but it’s not. I’ve been able to tell every dollar what to do. I can set goals for myself, make trade-offs, and avoid incurring more debt. That constant fear of not knowing if I’ll make it to the next paycheck has vanished. It’s also worth noting that while it may feel difficult at first to adjust, your income is likely to increase as you pay down your loans. Luckily, your spending habits will stick even as you increase your wealth.

How do you save for the future, pay your debt, and live fully? You take control of your financial situation—warts and all.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Considerations for Being Self-Employed Versus an Employee

Considerations for Being Self-Employed Versus an Employee

 

It’s no question that the pandemic has resulted in major shifts in the workforce. Whether it be the large-scale layoffs in March 2020 or the Great Resignation that more recently impacted personnel changes, we know that millions of Americans have left their jobs due to burn out and/or to pursue starting their own businesses in the hope of finding something that brings more personal fulfillment. In 2021, there were over 5 million new business applications submitted, which is an astonishing 55% jump from 2019.1

If the idea of starting up your own business has been on your mind, you have more than likely asked yourself if it’s the right thing to do financially—or at the very least are curious about all the differences between working for a company or being self-employed. We highlight the pros and cons for both options below.

 

Taxes

First and foremost, taxes are the greatest change when making the switch from employee to self-employed. Most employed individuals are familiar with various line items for federal and state taxes, Social Security, and Medicare amongst many other potential employer-provided benefits (more on those other benefits later). When you’re self-employed, you, of course, still pay federal and state taxes, but in place of the regular line items for Social Security and Medicare, the IRS adds a self-employment tax. Typically, the Social Security and Medicare amounts are figured by employers, but self-employed individuals (or their tax professionals) need to calculate out what their self-employment tax looks like. The self-employment tax rate is 15.3% which consists of two parts: 12.4% for Social Security and 2.9% for Medicare. And, just as employers do, you can deduct the employer portion of your self-employment tax to calculate your adjusted gross income.2

Sticking on the topic of deductions, self-employed individuals can deduct expenses for their business that can reduce taxable income. Things like phone bills, internet bills, home office expenses, business travel, and health insurance are all common examples of deductible items for the self-employed, and these are all things you can’t typically deduct as an employee. While finding deductions can sound fun, it also means a lot more work on the administrative side by tracking each of these items and having proper documentation to help you make sure you’re maximizing your deductions.

 

Savings

As an employee, you can maximize your pre-tax or Roth 401(k) contributions up to the IRS limit of $20,500 or $27,000 for those age 50 and above (2022). When you’re self-employed, you are eligible to make contributions to a solo 401(k) as both the employee and the employer. This means you can contribute up to $20,500 for your employee contribution then contribute up to 25% of your compensation on top of that for the employer match.

With regard to savings, one item that could be considered a small perk of being self-employed is having the freedom to choose which custodian you utilize for your retirement savings.

 

Benefits

Going back to the topic of benefits, employees are usually offered benefits through their employers, such as paid time off, health and life insurance, free/discounted fitness memberships, retirement plan matching or employee stock awards, donation matching, paid family leave, adoption assistance, and sometimes even retailer specific discounts. These benefits can certainly provide peace of mind beyond their monetary value for some and don’t exist when you’re self-employed.

 

Flexibility/Stability

One huge benefit of being self-employed is the amount of flexibility it provides. You can decide to work from home, a local café, or even beachside. You choose your own hours and aren’t limited to the amount of paid time off you’re allotted each year when you feel like taking a vacation. You’re also your own boss, so there’s no risk of having a supervisor managing you and potentially causing friction. On the flip side, there also aren’t any paid holidays or sick days. Without the oversight of a manager and being fully responsibility for the growth of your business, it takes a great amount of motivation and focus to be self-employed, which could also result in longer hours. There may be periods, especially in the early stages, where earnings may be lower or inconsistent, so making sure you’re prepared will be of utmost importance. Being okay with failure before finding success is a common theme amongst entrepreneurs, and remember that what you gain in freedom, you may also lose in security.

Being an employee typically means stable income; however, this also means your livelihood is dependent on your company’s success. The stability of working as an employee can be more than a steady source of income—it can also mean long-term career development and opportunities and more convenient access to building long-term professional relationships.

 

It’s quite clear that there are many considerations for anyone thinking about making career changes, but there’s no reason you should have to think things through on your own. It’s ultimately a personal choice, but we recommend getting in touch with your advisor or clicking here to connect with an advisor at Merriman to discuss what makes sense for you and your lifestyle.

 

 

Sources

1 https://www.today.com/video/american-workers-are-becoming-their-own-bosses-through-the-great-resignation-130454597857

2 https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

 

Disclosure: The material is presented solely for information purposes and is not intended as specific advice or recommendations for any individual. The information presented here has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

 

 

The Roth Rulebook

The Roth Rulebook

 

When preparing for retirement, it can be important to save money in different types of accounts to give you flexibility when it comes time to spend those funds. One of the most powerful and misunderstood types of accounts is the Roth. A Roth account is an after-tax retirement account that can be in the form of an IRA or an employer-sponsored plan such as a 401(k). The after-tax component means you pay tax on the front end when receiving the income, and in exchange, you can receive tax-free growth and tax-free withdrawals if you follow the rules of the Roth. There are three components to consider: contributions, conversions, and earnings. Contributions and conversions refer to the principal amount that you contribute or convert, while earnings refer to the investment growth in the account. There are contribution and eligibility limits set by the IRS each year, but today we will focus on withdrawing funds from a Roth IRA to maximize the after-tax benefit.

 

Roth Contributions

After you contribute to a Roth IRA, you can withdraw that contribution amount (principal) at any time without paying taxes or the 10% penalty. That is an often-overlooked fact that can come in handy.

Example: Ted is 38 years old and decides to open his first Roth IRA. He contributes $5,000 to the account immediately after opening it. Two years later, Ted finds himself in a financial bind and needs $5,000 for a car repair. One of the possible solutions for Ted is that he could pull up to $5,000 from his Roth IRA without paying any tax or penalty.

 

Roth Conversions

A Roth conversion is when you move funds from a pre-tax account such as a traditional IRA. You will owe income tax on the amount that you convert. This can be a powerful strategy to take control of when and how much you pay in taxes. There is no limit to how much you can convert.

When it comes to withdrawing money used in a Roth conversion, five years need to have passed or you need to be at least 59.5 years old to withdraw the conversion penalty-free. It is important to remember that each conversion has a separate 5-year clock.

Example: Beth is 50 when she executes a $40,000 conversion from her IRA to her Roth IRA in January 2020. In March 2025, Beth finds herself needing $40,000 for a home renovation. One of the possible solutions is that Beth could pull up to $40,000 from the conversion that she did over five years ago even though she is under 59.5.

 

Earnings

When it comes to withdrawing earnings from growth that has occurred after contributing or completing a conversion, you must wait until age 59.5 and five years need to have passed since you first contributed or completed a conversion. If you don’t follow both of those rules, then you could have to potentially pay income tax on the growth and a 10% penalty.

Example: With our previous examples above with Ted and Beth, even though they can withdraw their contribution and conversion respectively, neither of them can touch the earnings in their Roth accounts until they are 59.5 and have satisfied the 5-year rule.

 

Other Important Details

There are a few other exceptions that allow a person to avoid the penalty and/or income tax, such as a death, disability, or first-time home purchase.

For ordering rules, when a withdrawal is made from a Roth IRA, the IRS considers that money to be taken from contributions first, then conversions when contributions are exhausted, and then finally earnings.

 

Strategies 

  • Have a thorough understanding of the rules before withdrawing any funds from a Roth account.
  • Speed up the 5-year clock.
    • You can technically satisfy the 5-year clock in less than five years. You can make contributions for a previous year until the tax filing date (typically April 15th, but as of this writing, it may be April 18th in 2022). This means that a contribution on April 1st, 2022, could be designated to count toward 2021, and the clock will count as starting on January 1st, 2021. This shaves 15 months off the 5-year clock! Note: Conversions must be complete by the calendar year’s end (12/31), but you can still shave 11 months off the 5-year clock.
  • Start the 5-year clock now!
    • Even a $1 contribution or conversion starts the clock for you to be able to harness tax-free gains, so start as soon as possible.
  • After the passing of the SECURE ACT in 2019, most non-spousal IRA beneficiaries must now fully distribute inherited IRAs within ten years. This means that an inherited Roth IRA owner could potentially allow the inherited Roth to grow tax-free for up to ten more years and then withdraw those funds tax-free. If it fits into an individual’s financial plan, this can be a tremendous tax strategy to take advantage of.

 

Roth accounts can be incredible but also very confusing. As advisors, we figure out the best way to use these accounts to your advantage in terms of maximizing growth and minimizing taxes. If you have any questions about how you can best utilize a Roth account, please don’t hesitate to reach out to us. We are always happy to help you and those you care about!

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Nothing in these materials is intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such.

Generation 401(k)

Generation 401(k)

 

The 401(k) has only been around since the early 1980s. When Indiana Jones was searching for the Lost Ark, employees were just beginning to contribute to their own retirement savings instead of relying on employer-run pension plans. Widespread adoption took a few years, so we’re just now starting to see a generation of hard-working Americans who were in charge of their own retirement throughout their entire career. I call these individuals Generation 401(k).

Bull markets in the ‘80s and ‘90s gave a lot of people confidence that 401(k)s were a much better way to save, but then a couple of recessions in the 2000s made everyone take a closer look at the pros and cons of self-directed retirement savings. In reality, 401(k)s were a way for employers to cut costs and worry less about having to make pension payments in the future. For employees, being in control of one’s own retirement seemed like a great opportunity; but it turns out it was more of a huge responsibility than anything else.

Before 401(k)s, many employees worked hard and didn’t think about how much they needed to save to create an income stream during retirement because their pension would take care of it. The pension wasn’t optional—it was automatic—and the employer was on the hook if anything bad happened in the stock market. Then, all of a sudden, the 401(k) came along, and employees had to choose how much to save, figure out where to save it, and then be able to stomach the ups and downs of the economic roller coaster. As a result, there is a whole generation of soon-to-be-retirees who are just now realizing they don’t have enough saved to enjoy life after work.

Millennials aren’t Generation 401(k). For the most part, it’s the parents of millennials who got stuck making self-directed investment decisions but lacked guidance and education on how to do it. It’s not their fault. The parents of Generation 401(k) weren’t able to teach their children how to invest wisely because it was never something they had to worry about. The result was inevitable: When it comes to preparing for retirement, trying to figure it out along the way isn’t the best path to achieve a stress-free life after work.

Where does this leave us today? For many in Generation 401(k), it’s catch-up time. Quite literally. In 2001, laws changed that allowed individuals to put more into their 401(k), including a new rule that allowed employees 50 or older to save more than their younger colleagues. These extra contributions for those over 50 are called “catch-up” contributions. This means that the final 10–15 years before retirement is a crucial time for saving as much as possible. In other words: It’s pedal to the metal time for saving.

For the younger generations, millennials and Gen Z, financial resources and education have caught up to the times. Young adults in their 20s and 30s know that achieving financial independence is their responsibility. The internet has made finding planning tools and investment knowledge available at the touch of a button or a voice command (“Hey Siri, how do I save for retirement?”). Preparing for early retirement has even sparked a revolution in how we perceive life after work. The “Financial Independence, Retire Early” (F.I.R.E.) movement has an almost cult-like following. The principles at the core of F.I.R.E. are nothing new, but the delivery has entered the 21st century by embracing technology and social media.

There is one common thread between Generation 401(k) and the younger generations. Whether retirement is 5 years away or 30 years away, it’s not going to happen the way you want it to happen without a plan. People who are planning to retire can do it alone, or they can choose to work with a professional. In these times of information overload, the allure of the do-it-yourself method has created paralysis-by-analysis for many. There are so many different moving parts to putting together a well-thought-out retirement plan that many people start down the path only to end up frustrated and rudderless before actually doing anything.

If you find yourself worried about having enough when you retire and you don’t have time or energy to dedicate to creating a financial plan, then you should hire a professional who can help you. Also, it’s not enough just to create a plan. You need to work with someone who will ensure that you implement your plan. Hoping you’ll be able to enjoy life after work is a stressful way to go through life. Knowing you have a solid plan in place to achieve your financial goals can give you peace of mind. How do you want to retire? Hoping it’ll all work out? Or knowing you can be financially independent?

DISCLOSURE: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax or legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

The Ultimate Guide to 401k Rollovers

The Ultimate Guide to 401k Rollovers

Introduction written by: Daniel Hill

Meeting new clients is one of my favorite parts of working in wealth management. They come to us from all walks of life, and there’s a certain fascination associated with discovering each client’s journey that brought them to Merriman. Part of that discovery process involves understanding a client’s financial situation and looking at their previous work history. We see asset statements for IRAs, brokerage accounts, and, more often than not, an old 401(k) plan from a previous employer that’s been hanging around. Trust me, I’ve been there. Everyone switches jobs, and in the hustle and bustle of getting set up with a new company, the previous company’s 401(k) plan is left to its own devices with the assumption that it’ll continue to grow in value. But at what cost?

There are several options you can pursue in handling your old 401(k). We’ve put together a great tool to help you decide what to do: The Ultimate Guide to 401(k) Rollovers! We discuss your options, ranging from doing nothing to rolling your 401(k) into a traditional IRA. We walk through the advantages and disadvantages of each option as well as what to think about before making a decision. Every person has a different set of circumstances that must be taken into consideration, so ultimately, the decision you make has to be the one that is best for you. As always, if you find yourself wanting to speak with an expert, don’t hesitate to reach out to us at Merriman.

 

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Overcoming Financial Fears

Overcoming Financial Fears

 

Early in my career, I had several instances of folks canceling their appointments with me last minute. Some were for emergencies with work or family, and some were for reasons such as “not being prepared to meet” or “not sure this is the avenue I want to take” or, in rare cases, saying nothing at all. It was easy to take that personally, but over the years I have come to realize that such cancelations or procrastination in general when meeting with a professional financial planner is often driven by fear.

Let me give you some context. When someone has a financial problem today, they often will hit the internet—Google, YouTube, a blogger whom they follow for answers. When answers are harder to come by, they might call a trusted friend or family member and ask for help. Getting even to this point takes time; the question may be put back on the shelf for another day. But let’s assume it is a big issue, like buying a new home and figuring out how to finance two homes for a time. This person will need answers, soon, and a professional advisor to help. From here, they may ask for a referral or hit up Google again for folks to call—but then it comes the call, scheduling, and SHOWING UP to the appointment. They have gone through five or more steps just to get to appointment day, and now they are ready to cancel.

Why? We live in a world where finances are not often discussed, even amongst our closest family. We have been taught that you don’t discuss it, and then we are bombarded for years with the Joneses’ owning the next big, expensive item. Facebook and Instagram have shown us the best of other people’s lives; and by comparison, we feel inadequate, even if our financial road has been relatively free of detours. This feeling can make it difficult to approach a professional and lay out our financial truth. But I am here to say that it doesn’t have to be.

As an advisor, I pride myself on being neutral. Your financial life up to today is what it is, and we cannot change those facts. If you have debt, feel like you should have saved more, are late to the game, or have gotten this far by sheer luck, it does not matter. In fact, it does not change who you are as a person. If you are asking for guidance, any great advisor will take the time to educate you on what they feel is best for your situation and will strive to make you feel at ease.

As you are searching for an advisor, look for someone who you feel you can trust. Meet with several if the first one isn’t right. In fact, check out our blog posts on what to look for in an advisor and the 10 reasons why clients hire us. Everyone has something in their financial past that they are not proud of, and airing that to a stranger can feel scary; but I promise that we are not the “financial confessional” I once had someone mention to me. We are here to help and would love to meet you.

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.