Military Finance Report

Saturday, March 14, 2015

529 College Education Plan


529 plans are tax-deferred accounts used to pay for college expenses for a beneficiary (usually a child/grandchild) ran by states or education institutions. An investment in a 529 plan is invested in stocks and bonds and will grow tax free until the beneficiary is ready to use the money. The deductions are tax exempt if used for qualified college expenses. For the most part, 529s are a great way to save for your child’s college education but there are some considerations to think about before investing in one.
Benefits:

·         Tax Advantages: If you’ve read more than one article from my blog, you know I’m an opponent of taxes and I focus on helping people pay the minimum amount of taxes as possible. The money you invest in a 529 will grow tax free and when your beneficiary is ready to use the money for qualified college expenses, the earnings will also be tax free. 529 contributions are considered gifts so you’ll be maxed out at $14K a year in annual contributions to a 529.

·         Better Returns: 529s plans are run by States and in most cases have better returns than a simple savings account or treasury bonds. A parent starting a 529 when the child is born has ~18 years to save for the child’s college education. Some states do extremely well and provide amazing rates of return.

·         Realistic Program Management: Unlike most programs designed by the government, the 529 program is realistic and versatile. For military members this is especially important because you can switch 529 programs state to state depending on which state you live or are stationed in. You have an opportunity in picking which state has a better rate of return. For all parents, the 529 can be transferred from family member to family member. If one child doesn’t use it then you can pass it to another child or to a grandchild.
Considerations:

·         Sole Purpose: The sole purpose of a 529 plan is to help pay for a beneficiary’s college education. If you’ve saved more than the cost of a college education and have to liquidate the account then you will be penalized. If your child chooses not to attend college or receives a scholarship then you will have to liquidate and be penalized. The penalty for not using the funds for qualified education expenses is a staggering 10% so, if possible, only save enough for the education your beneficiary(s) can use.

·         Financial Aid Concerns: I try not to expose my political ideologies on my blog but financial aid and social programs are being abused by many people and not for its original intent. Financial aid for college is a common place to find such abuse. Many abusers receive more social welfare money for going to college and use financial aid with little intent on graduating college. For those parents who tried their hardest to save for a 529 but will still look for financial aid for their child, may be impacted in getting financial aid because the 529 will be part of the parent’s “net worth” calculation (a.k.a. Expected Family Contribution[EFC]) even though the 529 can only be used for college expenses. A 529 isn’t necessarily a part of the parent’s wealth as it is used for in the EFC calculation.

·         Limited Investment Options: I mentioned above that 529 plans have better returns than a savings account or treasury bonds but there are still limited investment options. You are limited to the State ran 529 plan for the State you choose. Some states offer deals for their own residents but the options are still limited.  

·         Post 9/11 GI Bill: The Post 9/11 GI Bill allows military members to transfer up to 36 months of education benefits to a family member. I received my Bachelor’s and Graduate’s degree using the Montgomery GI Bill (pre-9/11 GI Bill) and haven’t used any of my post 9/11 GI Bill benefits. I can transfer all 36 months to my children (though it comes with a 4-year Active Duty Service Commitment). So going back to the sole purpose consideration, be careful how much you invest if you’re planning on using the post 9/11 GI Bill for your child. You may have to liquidate more than expected and get penalized 10%.
529s are basically run like mutual funds. My #1 choice for all information on mutual funds is Morningstar.com. They have a great 529 Center on their site here: http://529.morningstar.com/state-map.action

Be careful when you’re doing a simple search for 529 information.  Some of the State-ran plans are worth several billion dollars and it’s a big business. Like all investments they want your money so a lot of Google searches will be advertisement-based over research based. Like I said above, I use Morningstar.com to search through 529s.

Wednesday, March 11, 2015

Multi-Level Marketing (MLM) Businesses and Taxes


Multi-Level Marketing businesses (MLMs) have exploded across the country; especially among the military spouse community. MLMs allow military spouses to run their own businesses at home and the job can move with their military spouse. I don’t have an accurate count but I’m sure there are nearly a hundred different MLMs out there. I’ve experienced the following MLMs: Pampered Chef, Amway, WUN Life, Isagenix, Pure Romance, Nerium, Origami Owl, Kyani and Scentsy.
A key thing MLM operators need to know is how to file their taxes. Although I haven’t run an MLM; I do have sufficient experience in tax preparation and here are some suggestions I’ve found doing research on this reader requested topic.

·         Create a separate checkings account to run your MLM. This will allow you to quickly differentiate between costs of running the MLM and income you’ve earned which will come in handy when dealing with deductions.

·         Before you even start your MLM find out if they give you a 1099-Misc Income Tax Form which identifies how much the company records as income you’ve made. Talking with MLM owners I found out that Pure Romance, Pampered Chef and Nerium file 1099-Misc forms with the IRS so you can claim that on your taxes as regular income. If an MLM doesn’t provide a 1099-Misc then it is incumbent on MLM operators to figure out how much income they’ve made. This is easier if you have a separate checkings account.

·         Running an MLM is similar to being self-employed and as such you can claim routine expenses as deductions if you itemize your deductions. If you have a separate checkings account it will make it easier to identify the costs. Some common deductions are phone and internet, party hosting expenses and gas/vehicle expenses for those MLMs which require frequent deliveries and travel. Itemizing deductions can help decrease the tax burden but it is important to ensure you’re legally entitled to the deductions.

·         If your tax situation requires you to itemize deductions then I recommend seeing a tax professional; either a tax preparation company or with a Certified Public Accountant (CPA). A professional can ensure you meet the qualifications for itemizing certain expenses and protect you from an audit.

·         For my non-military readers, if your MLM is your family’s sole source of income PLEASE ensure you meet the necessary requirements to comply with the Affordable Healthcare Act (aka Obamacare). The penalties can be steep and are basically equal to the cost of a “bronze” health care plan. So until the law is changed or repealed, it’s a better return on investment to just ge the healthcare. Like I said before, an MLM is similar to being self-employed so you’ll need to ensure you comply with the federal government’s requirements for health care.
If you’ve run an MLM and filed taxes before please leave me a comment or recommendations you have for other MLM owners.

Tuesday, February 17, 2015

Changes to Military Retirement

This January the final version of the Report of the Military Compensation and Retirement Modernization Commission was published. (http://www.mcrmc.gov/index.php/reports) We’ve been hearing a lot about changing the military retirement plan since Secretary of Defense Hagel announced his ideas in 2013. Unfortunately, this topic is highly political, causes emotional stress and is very misunderstood so much that normal conversations quickly turn unproductive. Here are my thoughts on the situation.
THE PROBLEM
I’ve only been in for 15 years, but I’ve conclude that one of the major problems in the military is the inability to address the root problem. Here are the problems with the current military retirement system—as I see it.

1)      The Defense Budget is one of the largest expenses in discretionary spending. This post isn’t intended to discuss the ideologies about Mandatory and Discretionary spending; however, if there are cuts in the budget to be made, the Defense Budget would be the first place politicians look toward. Like all forms of business, Personnel and Labor are the largest cost drivers. For the military, our unique 20-year, annual inflation-adjusted, retirement plan is one of the most costly expenses. So the first problem is…budgets need to be cut and military retirement is a major cost driver to focus on by politicians.

2)      The second problem is the 20-year cliff dive. We have many Armed Forces members who serve honorably for less than 20 years and decide to separate. Besides what they’ve managed to save in their TSP or other savings, they do not receive any portion of their military retirement. This creates a 20-year, all or nothing, retirement plan. Many civilian jobs offer matching 401(k)s and pensions which compensate employees after an outlined amount of years.
SOLUTIONS (so far)

1)      Status Quo - Like I said, this issue is highly political and emotional. On most news sites, there are 300+ comments from retired military members and veterans regaling their war stories and any change to the military retirement plan offends them. All current recommendations would only apply to new military members so they wouldn’t even be impacted anyway. This solution will not last. There are some strong proponents of the status quo, including high-ranking members of professional enlisted and officer organizations. Regardless, the political pressure is getting stronger every year with little appetite to cut any budget anywhere else.

2)      Commission’s Recommendations - Senator Graham (R-NC) recently supported the Commission’s recommendation which is 40% of base pay at 20 years instead of 50%. Military members will get matching TSP contributions so if they choose to honorably separate before 20 years, they will have some retirement savings. (http://militaryadvantage.military.com/2015/02/graham-defends-pay-commission-after-hearing-its-critics/#idc-cover) Many professional organizations are opponents of this solution. They point several inconsistencies with the analysis the commission performed on their recommendation. These inconsistencies must be addressed because mathematically, even a one-percentage slip could cost a military member hundreds of thousands of dollars over several decades.

MY THOUGHTS
Personally, I believe the military retirement should be changed. Military members separating before 20 years should receive sufficient compensation; especially in light of how inept Veteran’s Affairs (VA) is. It’s is unacceptable to leave the fates of veterans with the support from the VA. Selfishly, I would not like the amount of retirement to change. I don’t have a solution at this time but I think about it regularly and I do know that if we're going to change it then we should provide a solution before Congress provides one for us.

What solutions do you have?

Thursday, January 22, 2015

Top 3 Personal Finance Sites and Apps

The first step towards financial success is to track your money. You need to know where your money is going before you can make any sound decisions. There are many personal finance websites and apps that can help you do this. They integrate into your bank accounts and have amazing tools to help you manage your finances. Many of them are free so you may have to deal with some advertisements, but other than that, they are strong/powerful tools to aid you with your finances. Here are the top three that I’ve had personal experience with and/or had discussed with others about.
  • Mint - I used this for almost a year and I liked it a lot. I was able to integrate all my accounts in it and it helped create good trackers and it let me track some of my personal goals. I had it on my desktop and the iPhone app. The iPhone app had a lot of advertisements, but it’s worth it. I want this blog to become a good source of information and I also rely on advertisements to help earn income. The app is owned by Intuit so if you’ve used Quicken to prepare your taxes, then some of your Mint information can quickly transfer over when filing your taxes.
  • You Need a Budget (YNAB) – The full service costs money but it offers a social experience to it too. You can go on their forums and talk to others, view their tutorials and lessons and get real advice from professionals. They’ve recently released a free “lite” version of their product and it’s still very powerful. Some of my friends love the feature that gives you tailored advice if it notices you’re living paycheck-to-paycheck. I’ve been helping people with their finances for over a decade now and a lot of people don’t like asking for financial help (especially men). A friend of mine loved getting good advice from the app while retaining his privacy.
  • Personal Capital – A friend personally recommended I post about this one. This site is less about the budget and more about investing and managing your money. I’ve read a lot of good reviews from users and they are very happy with the reduced amount of advertisements compared to Mint.com. I’ve never personally used it before but I trust the recommendation.
These are very powerful tools that you can use. Working with a Certified Financial Planner can be very costly, so even paying $60 for YNAB will save you money over the long run. Check out each website and let me know which one you prefer or like to use.  What other sites do people use?

Sunday, January 4, 2015

2014 Year in Review and 2015 New Year's Resolutions

Every year I create financial goals to help guide me through the year. I first read this quote when I started my fitness journey regarding meal preparing, "If you fail to prepare, then you are prepared to fail." (Unknown). I think this is relevant in any goal management, but especially with financial goals. Here's a sneak peek at how I managed my finances in 2014.
  • Max out Individual Retirement Account (IRA) - In 2014, the limit was $5,500. This is always my first goal and I've been maxing it out every year for almost a decade. This is my first goal in 2015 as well. I use Fidelity to manage my IRA; if you're interested in starting a Fidelity account please let me know so I can refer you. In 2014, I met this goal.
  • Put $XXK into my "high-yield" savings account - This is my emergency savings account. I'm expanding it beyond the 6 months of bills (the typical advice) to add 12 months of bills for my new house. My goal is to have the ability to absorb a whole year of not having a renter when we PCS and have to rent this house out. Some of the increase will also be for a new car in 1 1/2 years. I use CapitalOne 360 (the bank that bought ING Direct) for my "high-yield" savings account; if you're interested in starting a CapitalOne 360 account please let me know so I can refer you and we both get money. In 2014, I met this goal.
  • Save at least $XK from each paycheck - Ever since I was an E-4 I've been creating this goal. No matter how hard you plan, you'll always have unexpected costs throughout the year. For this goal, I'm focused on the end goal so if I can't save the goal from one paycheck, I'll make sure I save a little more from a future paycheck. But this gives me an average savings goal from each paycheck and allows me to see if I'm exceeding my goal or not meeting it. In 2014, I met this goal.
  • Increase dividend income by X% to $XK - One of my retirement goals is to supplement the amount I lose by retiring with dividend and interest income by the time I retire from the Air Force. This is a lofty goal and I may need several years after Air Force retirement to achieve it. Nonetheless, I try finding better return rates on my investments to achieve this goal. One of my new investments this year was Lending Club. They offer loans ($35K or less) to people and investors can contribute $25 increments to their loan so it spreads the risk while offering a better yield. By playing it safe, I earned a 9%+ return on investment this year. If you're interested in starting a Lending Club account please let me know so I can refer you and we both get money. In 2014, I DID NOT meet this goal. I was very close but missed the goal by less than $200. I'm not too worried, but next year I would like to say I exceeded the new goal I set.
  • Net Assets of $XXXK by the end of the year - This is just an overall goal. I don't focus on how much I have saved total. I focus on what the money is doing and what return on investment I'm getting. People focus on a round number like $1M without figuring out what their going to do with it once they get there. Most rich people don't even care how much total they are worth, they only care how much money it's earning so they can use it. Either way, it helps me focus and ensure I'm earning a decent of return on investment. In 2014, I DID NOT meet this goal. I tried to do some ultra-risky investments to help my wife pay off her school loans and they all back fired on me. I lost a lot of money this year on those investments and it stings pretty badly. My house equity didn't rise at all either like I had expected. In fact, I manage my Dad's IRA and it's pretty conservative and safe and he crushed my returns this year.
These goals are specific to me. If I had debt-management goals, then those would be near the top. If I didn't have an emergency savings account, then that would've been my first goal. What are your goals for this year? If you need help or are interested in being referred so we both get money please leave me a comment or e-mail me at bjone6 @ gmail . com (spaced out to prevent spam bots).

Monday, December 22, 2014

Rising Interest Rates and Military Retirement Impacts

Last week, Russia raised its key interest rate 17% to 10.5%. (Bloomberg, 2014) While I personally believe raising the interest rates would be good for America’s economy and long-term economic success, I do recognize the rise would impact our military; specifically, our military retirement plans. Rising interest rates will make our military retirement less valuable.
Our military retirement is fixed; which means the variables do not go up and down. Our retirement is based on what rank we retired as and how many years we served. Our retirement doesn’t change based off of America’s interest rates; only the annual inflation adjustment.
We can see the impact to our retirement plan using my “Military Retirement Value” calculation blog post. A Major at 20 years (I use this because it applies to me) will receive $3,715 a month in retirement.  By comparing it to the yield on a 30-year bond (3%), the retirement is worth $1.5M. If interest rates rise to 4% then the retirement would be worth $1.1M; 5% is $892K. The reason why is because civilians can invest their retirement and gain from higher interest rates, while a fixed military retirement suffers because of rising interest rates.
I personally believe the economy will see inflation and America will be too slow to raise the interest rates to slow it down. The costs of normal consumer goods and borrowing money will rise. Groceries will be more expensive and your credit card interest rates will rise while your retirement will stay the same and you’ll have to wait for the lagging annual inflation adjustment.
What can you do to reduce the impact?
The first thing to do is eliminate all adjustable-rate credit sources. These will increase when the interest rates rise while your income will probably not.
Next, take advantage of the rising interest rates. When then interest rates increase you can find safer investments then stocks to get the same yields. Most people won’t have the flexibility to take advantage unless you’ve been a long-time reader of this blog.
If you’ve been a long-time reader, leave me a comment.
Source: http://www.bloomberg.com/news/2014-12-15/russia-increases-key-interest-rate-to-17-to-stem-ruble-decline.html

Sunday, December 14, 2014

2015 Military Basic Pay Charts and BAH Cut

Last night, the government passed the $1.1 trillion budget, known as an "omnibus" for the federal government. The bill includes a 1% basic pay increase for all military members except for Generals and Flag Officers which are still in a pay freeze and a 1% cut to our Basic Allowance for Housing (BAH). Here's a link to see the proposed 2015 Military Basic Pay Charts, though the site is not the official DFAS site.

Although I've attached the link, you can simply look at your LES and add 1% to your basic pay while decreasing your BAH by 1%. For me, this equates to a net .07% pay increase. That's less than a 1% pay raise. The main reason for cutting the BAH was the Pentagon and Congress don't feel that renter's/homeowner's insurance should be part of our BAH.

How does this make you feel? For me, I've noticed a significant reduction in personnel with an increase in the amount of work. Not being fully compensated makes it a more difficult burden to bear. Leave me a comment on how you feel.

Sources:
http://www.military.com/daily-news/2014/12/02/congress-agrees-to-troop-pay-bah-cuts-in-budget-compromise.html