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June 2014 Monthly Planning Tips

Greetings, and Happy Summer Solstice!  I hope everyone has been able to enjoy the nicer weather.   I am pleased to share this month’s financial planning tips topic: Systematic Savings to Establish or Increase Cash Reserves Developing savings discipline is vitally important to building wealth and achieving many financial goals.  An important characteristic of wealth is that it’s not what you earn, but what you have that matters.  So, save early, save often!   I hope you find this information to be helpful.  Feel free to forward to anyone who may benefit.  Please contact me with any questions, or if you would like to discuss/would like assistance with any personal financial planning topics such as cash flow/budgeting, health care, taxes, insurance, investing, college/retirement planning, estate planning.

Systematic Saving to Establish or Increase Cash Reserve What is systematic saving?As its name implies, systematic saving is the process of saving a portion of income on a regular basis. It is important because establishing or increasing a cash reserve should be the first savings objective of a financial plan. Further, most people do not save on any systematic or regular basis, so the plan’s long-term success is likely to benefit from early development of this excellent habit. Pay yourself first For those who do not yet have financial security and independence, systematic saving and building a cash reserve are the first steps (managing debt is a close second, except in dire situations). You should look at systematic saving as paying yourself before you are tempted to spend it elsewhere. Money spent is money that usually must be replaced by working for it. As the adage goes, a penny saved is a penny earned. The benefits of automatic savings With an automatic savings plan, you formally arrange with an employer or financial institution to set aside periodically a specified amount of money from your income or an existing account. This is different from simply planning to save regularly on your own, which requires that you take action on your own to set aside the specified amount each time. Automatic plans are preferable because the transactions are made by others and the temptation to divert funds (out of sight, out of mind) is reduced. However, planning for periodic savings, which is often part of a budgeting process, is better than not saving at all, especially if the routine savings amount is viewed as a mandatory bill payment. Automatic savings also is more convenient, since it’s handled by others. Automatic payroll savings plans Today, many companies offer a payroll savings plan as an employee benefit. These plans automatically withhold an agreed-upon amount from each paycheck and deposit it in an account on behalf of the employee. The employee usually is free to start and stop the withholding process and to change the amount withheld, provided changes are within reason and according to the plan’s established guidelines. Automatic account transfers Most financial institutions offer depositors an opportunity to have funds automatically moved between accounts on a periodic basis. While not a savings plan as such, automatic transfers provide a convenient way to save, regardless of the objective. These plans tend to offer significant flexibility in starting, stopping, and altering the amount being transferred, plus a selection of several types of accounts. Banks and credit unions–Many people keep a checking account and a savings account at the same institution, usually to capitalize on fee discounts and other benefits. In addition to basic savings and checking accounts, financial institutions also often offer money market deposit accounts. They also may have other types of term deposit accounts. Having multiple accounts at one institution can facilitate having a specified amount transferred periodically to an account you designate for cash reserve savings. Example(s): Jane arranged with her employer for the automatic deposit of her paycheck into her checking account at the ABC Bank. She now can request that the bank automatically transfer $500 each month to a money market deposit account that she also has set up as part of her cash reserve. Brokerage firms–More and more, brokerage houses and large mutual fund companies offer accounts and services similar to those of banks (the reverse is also true). Consequently, you will often find opportunities for automatic payroll deposit and automatic account transfers outside of banks. If you hold investment securities with a brokerage, for example, you might arrange to have earnings from those securities automatically deposited to a money market mutual fund rather than automatically reinvesting the earnings. However, be aware that unlike bank accounts, these accounts do not qualify for insurance by the Federal Deposit Insurance Corp. (FDIC). Caution:  Don’t confuse a money market deposit account with a money market mutual fund; a money market fund–even one sold by a bank–also is not FDIC insured. It’s possible to experience a loss in a money market fund, though funds typically will go to great lengths to avoid letting their share price drop below the standard $1 per share. Obtain and read a fund’s prospectus (available from the fund) so you can find out about its investment objectives, risks, charges, and expenses, and consider them carefully before investing. Caution:  Be cautious of tax implications here. Tax laws change frequently. Budgeting for regular savings Whether or not you use formal budgeting to manage your financial activities, you can plan to contribute a specific sum regularly to your cash reserve. If you do use a budget, think of the amount you save as a regular expense, similar to other high-priority expenses. Match your savings approach to your needs When implementing a systematic saving plan, begin by selecting an approach that best matches your needs. Example(s): Jane’s bank offers money market deposit accounts whose interest rates are higher than those in her employer’s payroll savings plan. The deposit account’s minimum balance requirement of $2,000 is not a factor for Jane, so the bank option is her best choice. You may find that you need a more aggressive approach to saving than a single-step approach can provide. You can increase your savings rate by adding a new approach to those already in place. Example(s): If the automatic savings that Jane arranged with her bank is insufficient to achieve her goal within her time frame, she can also arrange for dividends from stock shares she inherited to be automatically held in her account instead of being reinvested. She can then move these funds into her cash reserve once a significant sum has been accumulated.
IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014.

May Monthly Tips


Retirement Plan Options

There are a variety of retirement plan options available for small business owners and self-employed folks. Each one has its own set of rules. Which option someone picks, and how a particular plan is utilized, can make a big difference in retirement savings. The key is to find the plan that is right for you, and to take advantage of the savings and tax features as much as you can. Retirement plans generally allow for tax-deferred growth of contributions and investment returns (tax free growth for Roth-type plans).

You will also want to clearly define your goals before choosing a plan. For example, do you want:

  • To maximize the amount you can save for your own retirement?
  • A plan funded by employer contributions? Employee contributions? Both?
  • A plan that allows you and your employees to make pretax and/or Roth (after-tax) contributions?
  • The flexibility to skip employer contributions in some years?
  • A plan with the lowest costs? Easiest administration?

Here is a summary of the major retirement plans available to small businesses the self-employed:


– Allows you to set up an IRA (a “SEP-IRA”) for yourself and each of your eligible employees. You can contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year, offering some flexibility with varying business conditions. SEP plans provide for employer contributions only. Contributions for 2014 are limited to the lesser of 25% of pay or $52,000 for each eligible employee. Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using an easy two-page form.

Caveat – if you start a SEP IRA as a self-employed person (e.g., S Corp. or LLC owner, or sole proprietor) then later hire employees, you must make contributions for all eligible employees (age 21 or older, employed by you for at least 3 of the last 5 years), as well as yourself…because the money you put into a SEP counts as an “employer” contribution.


– Available to employers with 100 or fewer employees. Employees can elect to make pretax contributions in 2014 of up to $12,000 ($14,500 if age 50 or older). Employers much either match your employees’ contributions dollar for dollar – up to 3% of each employee’s compensation – or make a fixed contribution of 2% of compensation for each eligible employee.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up for each eligible employee. A financial institution can do much of the paperwork.


– The 401(k) plan has become a hugely popular retirement savings vehicle for small businesses and the self-employed. Employees can make pretax and/or Roth (after-tax) contributions in 2014 of up to $17,500 ($23,000 if age 50 or older). Employers can also make contributions – either matching (typically up to a specified percentage of employee pay) or discretionary profit-sharing contributions. Combined employee and employer contributions can’t exceed the lesser of $52,000 (plus an additional $5,500 if age 50 or older) or 100% of eligible employee compensation.

Note that unless a 401(k) plan is a “safe harbor” variety (involving specified, fully-vested percentages of employee pay contributed by employers), somewhat complicated discrimination testing is required each year.

Note: – “Solo” 401(k) plans are available for the self-employed. However, any employees (if eligible) later hired by the self-employed person must be allowed to participate in a 401(k) plan set up under the self-employed person’s/small business owner’s business (similar to SEP-IRA caveat noted above).

Profit-sharing plan

– Typically, only employers contribute to a qualified profit-sharing plan. Contributions are discretionary – there is usually no set amount you (as employer) need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be nondiscriminatory, and “substantial and recurring”). The plan must contain a formula for determining how your contributions are allocated amongst plan participants, and a separate account is established for each participant. Contributions for 2014 can’t exceed the lesser of $52,000 or 100% of employee compensation.

Some varieties of profit-sharing plans can be structured to favor older or highly compensated employees; however, this approach can involve complicated calculations and may require actuarial consulting (though typically less expensive and more flexible than a defined benefit plan).

Defined benefit plans

– Qualified retirement plans that guarantee employees a specified level of benefits at retirement (for example, an annual benefit equal to 30% of final average pay). In 2014, a defined benefit plan can provide an annual benefit of up to $210,000 (or 100% of pay if less). The services of an actuary are generally required, and these types of plans are generally too costly and complex for most small businesses. However, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

I hope you find this information to be helpful. Feel free to forward to anyone who may benefit. Please contact me with any questions, or if you would like to discuss/would like assistance with any personal financial planning topics such as cash flow/budgeting, health care, taxes, insurance, investing, college/retirement planning, estate planning.


March Monthly Tips


Last Minute Tax Planning Tips

Greetings, and Happy Spring (sort of) to everyone! Someday in the hopefully not-too-distant future, the temperature will rise above freezing, snow will melt, flowers will bloom…

But in the meantime, I am pleased to share my Financial Planning Tips email for this month: Last Minute Tax Planning Tips.

As the April 15 tax filing deadline approaches, it can be very advantageous to take last-minute planning steps, and to focus on accuracy and completeness of tax returns and supporting documentation. Below are a few things to consider as you look to wrap up your 2013 taxes:

Money Saving Ideas

Contribute to an IRA or HSA plan

For tax year 2013, you can contribute up to $5,500 ($6,500 if age 50 or older) to an IRA. An IRA can be a great retirement savings vehicle, and anyone can contribute to a traditional IRA. Whether you can contribute to a Roth IRA (where your money grows tax free) depends on your income; contributions by higher income taxpayers to a Roth IRA are limited or not allowed.

Contributions to a traditional IRA may be tax deductible, depending on your income, and whether you participate in an employer’s retirement plan.

NOTE: IRA contributions for 2013 can be made until April 15, 2014.

Health Savings Account (HSA) contributions

If you bought your own health insurance in 2013 and it is HSA-compatible (those of you who attended my Health Care Reform class will know what that means!), you may make a tax-deductible contribution to a HSA account (regardless of how high your income is), which provides tax savings on eligible health care expenses, as well as tax-free growth on earnings (interest, dividends) of HSA funds. 2013 HSA contribution limits are $3,250 for individuals and $6,450 for families. Like IRA contributions, HSA contributions for 2013 can be made until April 15, 2014.

NOTE: The use of HSA accounts should increase significantly in 2014 and beyond because of the Affordable Care Act (“Obamacare”).

Child Care Expenses

If you have kids and you pay for daycare so you can work outside the home, you may be eligible for the Child and Dependent Care Tax Credit. The maximum credit is $3,000 for the first child, or $6,000 for two or more children. The credit amount that any taxpayer is eligible for is highly sensitive to income – the higher your income, the lower the eligible credit. And note with a tax credit, taxes are reduced dollar for dollar, making credits much more valuable than deductions.
So, if you have eligible daycare expenses, don’t miss out on this potentially valuable tax savings benefit!

Check for Donations

For one last-minute tax tip, dig through your bank statements and receipts for any donations you made to charities last year. These donations can really add up, and are often overlooked as tax deductions. Remember, however, that to write off any charitable contributions, you have to itemize. Often, if you own a home, mortgage interest and property taxes (as well as State income taxes) add up to enough to surpass the standard deduction – $6,100 for individuals and $12,200 for a couple married filing jointly in 2013 – and allow you to itemize deductions.

It’s also important to keep good records. Larger charities will typically send you a year-end statement of your deductions, but smaller charities often don’t, so you’ll want to keep a copy of your receipts and/or bank or credit card statements.


Check for Accuracy and Reasonableness

Lastly, it is important to actually read through and check your tax returns and supporting schedules for accuracy and reasonableness before filing. Follow up on any errors or anything that doesn’t look right, e.g., your taxes are much higher than the prior year; your deductions seem too low; your Social Security number is incorrect. With most tax returns now prepared using software, these important steps are often overlooked.

If you are not ready to final your final returns by tax day, consider filing an extension. But be careful – to avoid penalties, you will still have to pay by tax day (April 15 for most people) at least the amount of tax you will ultimately owe…so if you don’t have your final tax liability calculated by tax day, consider making a conservative (high) payment with your extension. It’s better to get a refund back later than to get hit with penalties.

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