Financial Planning FAQs

Striving to contribute at least 10-15% of your gross salary is a good goal to strive for in hopes of maintaining a similar standard of living in retirement. If you are unable to contribute that much currently, making incremental increases over time can help get you there.

As long as one spouse is employed, the non-working spouse can make IRA contributions up to the annual contribution limit as long as the combined contributions do not exceed the taxable compensation reported on the joint tax return.

After terminating employment, you have four basic options: keep it in the plan, roll it to your new employer’s plan, roll it to an IRA, or cash out. Taxes and penalties may apply if cashing out.

Unless certain allowed conditions are met, withdraws prior to age 59 ½ are generally subject to a 10% early withdrawal penalty. These distributions would also be subject to income taxation unless coming from a Roth account. Hardship withdrawals or loans may be permitted from some employer sponsored plans.

For accounts to which they apply, your first RMD must be taken by April 1 of the year after you turn 73. Subsequent RMDs must be taken by December 31 of each year. If you fail to take your RMD, you’ll have to pay a penalty of 50% of the RMD amount. Inherited accounts have different requirements.

You can begin Social Security retirement benefits as early as age 62 or as late as age 70. Benefits will be reduced if started prior to full retirement age and will be higher if delayed past full retirement age.

You can collect Social Security retirement benefits while working, but a portion may be withheld if your income is above certain annual limits. Benefits are no longer reduced once you reach full retirement age.

Contributions to a 529 may be deductible for state income taxes depending on your state of residency but are not federally tax deductible. Earnings are generally not subject to taxation when used for qualified educational expenses.

Expenses for tuition, room and board, required student fees, books, supplies, and equipment (including computers) are all qualified educational expenses for 529 distributions. For students living off-campus, rent and grocery expenses are also allowed to the extent allowed by that particular school.

You are not restricted to using your own state’s plan, but your state may offer incentives such as tax deductibility of contributions that could make it more competitive than another states’ plan.

The student is not limited to attending school in a particular state.

The beneficiary of all or a portion of a 529 plan can be changed as long as the new beneficiary is a family member of the old beneficiary. That includes children and their descendants, stepchildren, siblings, parents, stepparents, nieces, nephews, aunts, uncles, in-laws, and first cousins.

The American Opportunity Tax Credit (AOTC) is available for the first four years of higher education, and the lifetime learning credit is available for any year of education past high school, which even includes job enhancement training not tied directly to a degree or certificate. Income limitations apply to both.

The student loan interest deduction allows you to claim up to $2,500 of student loan interest paid even if you don’t itemize your deductions. The deduction is subject to phase-out above certain income levels.

With a bi-weekly repayment, one-half payment is made every two weeks rather than a full payment once per month. This results in paying the loan off sooner and reducing the interest paid over the life of the loan.

A standard rule for lenders is that the monthly housing payment (principal, interest, taxes, and insurance) should not exceed 28% of your pre-tax income. Total debt repayment, (mortgage, car loans, student loans, credit card debt, etc.) should generally not exceed 36% of income.

By making an additional monthly payment toward principal, you can pay off the loan sooner and reduce the interest paid over the life of the loan.

Consider what your spouse and dependents would need in order to live comfortably and have financial stability if you weren’t around. Factor in covering day-to-day bills and child care expenses, as well as larger expenses like college expenses or paying off the mortgage.

The two main types of life insurance are term life insurance, which offers coverage that may be purchased for a specific time period, and permanent life insurance, which offers protection for an entire lifetime. Some examples of permanent insurance include whole life, universal life, and variable life.

Term life insurance is protection for a specific time period, typically between 10 and 30 years. It is a cost effective way to cover specific financial responsibilities, such as paying for a mortgage or saving for college expenses.

Permanent life insurance is protection for your entire life, as long as sufficient premiums are paid. Properly structured and maintained permanent life insurance builds equity in the form of cash value.

Life insurance proceeds are typically income tax free, but they may still be included in your estate for estate tax purposes.

Long-term care involves assisting someone with a continuing physical illness, disability, or cognitive impairment in dealing with the activities of everyday life. Depending on the policy, it may include home health care, respite care, adult day care, nursing home care, and care at an assisted living facility.

After a triggering event, such as the inability to perform certain activities of daily living (i.e. bathing, continence, dressing, eating, toileting, and transferring), benefit payments will begin following the waiting period, also known as the elimination period, that is generally 30, 60, or 90 days depending on the policy.

You can usually buy inflation protection that increases your benefit payment annually or periodically, such as every three years.

Long-term care insurance benefits are generally not taxable. If you have a federally qualified policy, the premiums paid for the insurance might be tax deductible as an itemized deduction.

Everyone’s financial needs are different, but typical disability policies replace about 60% of after-tax income. Consider how much money you’d need to live on if you stopped receiving a paycheck.

Each policy defines disability differently. Some policies consider you disabled if you are unable to perform your own occupation, while other pay only if you are unable to perform any occupation.

Benefits will start paying out following the length of the waiting or elimination period. Typical elimination periods could be 30, 60, or 90 days.

If you purchase disability insurance with after-tax dollars, the benefits are usually tax-free. If the disability coverage is paid for by your employer, then the benefits are generally taxable.

A will is a legal document that establishes your wishes regarding the distribution of your property and the care of any minor children. To increase the likelihood of your wishes being carried out, the will should be in writing and signed by you and your witnesses.

A trust is a fiduciary relationship in which one party (trustor) gives another party (trustee) the right to hold title to property for the benefit of a third party (beneficiary). Common uses for trusts include increasing privacy of an estate, minimizing estate taxes, and controlling the timing and use of assets by your heirs.

A power of attorney is a legal document that permits another person to act on your behalf. This can become particularly important in the even that you become incapacitated and are unable to make decisions on your own.

A healthcare power of attorney is a legal document that permits another person to make medical decisions on your behalf in the event that you are unable to do so on your own due to illness or incapacity.

Also known as advance healthcare directive or medical directive, a living will is a legal document in which you specify what actions should be taken regarding your health if you are unable to make decisions on your own due to illness or incapacity.