How to Increase Your Financial Literacy

Unlike verbal literacy, financial literacy isn’t often taught in schools—which means that many people may enter adulthood without having all the tools they need to make informed and effective financial decisions.[1] Fortunately, gaining financial literacy doesn’t need to be a long or complicated process. Read on for three simple things you can do to work toward increasing your financial literacy. Subscribe to Reputable Financial Publications and Newsletters As with just about any topic, the more you read about investing, budgeting, and analyzing financial strategies, the larger your base of knowledge will be. A strong knowledge base in a particular subject can make it easier to make wise decisions in the future—you should already have a good feel for the “do’s” and “don’ts” of certain financial questions. There are a variety of high-quality financial publications, newsletters, and daily digests that can be emailed to you for free. You can also opt to become a paying member of one or more financial websites in order to get advice that’s better tailored to your interests and goals. Manage Your Assets and Debts Financial literacy doesn’t exist in a vacuum—in other words, the purpose of increasing your financial literacy is to put yourself in a position to make better financial decisions. Two key parts of this include: Putting your assets to their highest and best use; and Reducing your debts and minimizing your “burn rate.” Investing in the stock market is often a key component of the first prong. Although the stock market is more volatile and less “safe” than cash, each dollar you invest now, at a modest six percent rate of return, will grow to $5.74 in 30 years.1 By putting even a

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4 Tips for a Healthier Financial Outlook

With Public Health Week on the way,[1] it is not only time to consider your physical and mental health but also your financial health. When your financial outlook is healthier, you will be less stressed and enjoy what all your hard work has given you. Start this Public Health Week by trying out a few tips to help create a healthier financial outlook for the future. Be Mindful When You Spend When it comes to spending money, be aware of what you need versus what you want. That doesn’t mean you should not buy the things you want, but it does mean making sure your needs and responsibilities are accounted for first. Thinking along these lines can help you make better spending choices and prevent you from regrets when you making a purchase. Save Early Saving early is important for many reasons. First, if you save for retirement early, your money is more likely to grow faster and could provide you with what you will need to enjoy your retirement. What you put aside will continue you be reinvested and hopefully snowball into a larger retirement fund when the time comes.[2] But retirement is not the only savings to focus on. Putting money aside for emergencies such as losing a job will better prepare you financially and alleviate stress when problems arise. Get a Handle on Debt Burying yourself in debt may lead to significant financial problems down the road and might even prevent you from obtaining some of your financial goals. If you already have debt, create a plan to pay it down as quickly as possible. Limit spending on items that are not necessary. Then budget in an

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What to Know About Roth IRA Conversions

A Roth IRA is a retirement savings vehicle like no other. Not only can account holders withdraw their contributions at any time without taxes or penalties, but also these accounts aren’t subject to required minimum distributions (RMDs)—and all earnings are tax-free.[1] Investors who feel they are too heavily steeped in pre-tax retirement contributions may decide to convert some traditional IRA contributions into a Roth, repaying any tax credits received for the contributions while allowing future gains to grow tax-free.[2] However, the Roth conversion process can sometimes be complex, and a misstep can cost you money in taxes, fees, and penalties. How does a Roth conversion work, and what should you know before getting started? What is a Roth IRA Conversion? A Roth conversion involves transferring pre-tax or tax-deferred retirement assets (from a traditional, SIMPLE, or SEP IRA) into a Roth IRA. This creates a taxable event, which means that you will likely owe taxes on the amount converted in the year of conversion—but after that, these contributions are treated as though they had originally been put into a Roth in the first place. You also shouldn’t owe any early withdrawal penalties, as the conversion simply moves these assets from one retirement account to another. When you reach retirement age, you can withdraw any earnings and contributions without paying a dime of tax. How are Roth Conversions Executed? The IRS has described three different ways to convert a traditional IRA to a Roth.1 A rollover allows you to take a distribution from your traditional IRA—usually by check or online transfer—and move that money into your Roth within the next 60 days. A trustee-to-trustee transfer requires you to instruct the financial institution that holds

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Contribute to an IRA Before the May 17th Deadline

Taxpayers of all ages may be able to claim a deduction on their 2020 tax return for contributions made to their Individual Retirement Account made through May 17, 2021 (the U.S. Department of the Treasury is delaying the April 15th deadline to file and pay taxes until May 17th, giving individuals and businesses another month to file and then pay the government what they owe). And unlike in past years, there is no longer a maximum age for making IRA contributions. Contributions to a traditional IRA are usually tax deductible, while distributions are generally taxable. There is still time to make contributions that count for a 2020 tax return, so long as the contributions are made by May 17, 2021. The good news is that taxpayers can file their return claiming a traditional IRA contribution before the contribution is actually made, but the contribution must then be made by the May due date of the return. While contributions to a Roth IRA are not tax deductible, qualified distributions are tax-free. In addition, low- and moderate-income taxpayers making these contributions may also qualify for the Saver’s Credit. Contribution Limits from the IRS Generally, eligible taxpayers can contribute up to $6,000 to an IRA for 2020. For someone who was 50 years of age or older at the end of 2020, the limit is increased to $7,000. The restrictions on taxpayers age 70 1/2 or older to make contributions to their IRA were removed in 2020. Qualified contributions to one or more traditional IRAs are deductible up to the contribution limit or 100% of the taxpayer’s compensation, whichever is less. For 2020, if a taxpayer is covered by a workplace retirement plan, the

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Retirement Income Planning

For investors approaching retirement, it is important to begin thinking about retirement income planning. This involves a mindset shift from accumulating an investment portfolio designed for growth to creating a portfolio of retirement income designed to help you pursue your lifestyle goals.[i] There is not a one-size-fits-all formula when it comes to determining how much income you will need in your retirement years, although most financial professionals agree that it is not necessary to replace 100 percent of working income.[ii] To determine retirement income needs and develop strategies for creating income streams, pre-retirees should consider the following factors: Goals. Identify what you want to get out of retirement. If you want to travel the world or pay for grandchildren’s college educations, your income needs will differ from someone who wants to simplify their life in retirement and focus on hobbies at home. Income sources. Anticipate your sources of retirement income, such as Social Security, pension, fixed annuities, and non-guaranteed income from investments. Carefully evaluate your options for when to begin claiming Social Security. For some people, it makes financial sense to claim benefits as early as possible; for others, it’s beneficial to defer benefit payments. Expenses. Estimate your fixed expenses and discretionary expenditures. Your retirement income plan should also address your anticipated needs for health care and long-term care in the future. For many retirees, health care is one of the most significant expenses they need to budget for.[iii] Consider also the potential impact of future inflation on your buying power. Market volatility. Depending on your risk tolerance and goals, your plan may be more focused on investing for potential gains during retirement, investing for both growth and income, or taking a more conservative approach using

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How Financial Asset Management May Help Investors Stay the Course

Most people who decide to purchase stocks, bonds, mutual funds, or other investment vehicles do so understanding that there are risks associated with investing, but believing that the potential growth they may realize over time outweighs such risks. However, because there are no guarantees, investing assets can be a nerve-wracking experience – especially during periods of market turbulence.[i] Taking a deliberate approach to financial asset management and working with a financial professional, rather than choosing to manage your own portfolio, may help you weather the ups and downs that come with investing.[ii] This, in turn, may make it easier to stay the course over the long run. Understanding the Elements of Financial Asset Management Financial asset management encompasses several concepts, including diversification, asset allocation, portfolio rebalancing, and the decisions that go into choosing and evaluating the performance of your investments.[iii] Let’s explore each of these individually: Diversification. You have likely heard the adage “don’t put all of your eggs in one basket.” The idea of diversifying your investment portfolio, which is a central tenet to financial asset management, is based on the idea of spreading risk by putting your investment dollars into multiple baskets. There is no one-size-fits-all strategy for how to diversify your portfolio. For one investor, a well-diversified portfolio may include just a handful of investments. For another, a portfolio with dozens of securities may be best.[iv]  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset Allocation. While diversification refers to investing in more than one security, asset allocation is a deliberate approach to diversifying, investing a certain percentage of your overall

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Beyond Retirement: Consider Your Other Goals

When it comes to financial stability, people tend to focus on paying off debt and saving for retirement. In reality, many other financial goals beckon to individuals during their lifetime. Because of this, it’s important to look beyond retirement when setting targets, no matter how old you are. Identify Future Objectives While it is never too early to start planning for retirement, waiting until you reach 65 years or older to truly live is a mistake many people come to regret. A number of exciting possibilities are waiting for you throughout your life: Building an emergency fund Creating and growing passive income Starting a business Owning a home Becoming debt-free Raising a family Consider Income Some people start their careers making six figures or more; this is rare. By about 25 years old, making $35,000 or so is a reasonable expectation. If your salary increases follow the historical rate and you have no major employment gaps, you could earn almost $2 million by the time you’re ready for retirement. Without a doubt, $2 million is a lot of money. If you take a second look at the list of potential financial goals, however, it begins to lose its comparative value. For instance, the current cost of a starter home is anywhere from $150,000 to $250,000. Similarly, student loans are one of the biggest obstacles to a debt-free life. The average student loan debt is $29,800. Create a Plan If you’re starting to feel discouraged, the good news is that money isn’t a static asset. It has the potential to grow and do some of the work for you by creating passive income. In fact, people who begin to invest in

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Tips for Tax Preparation

In 2020, the government gave taxpayers an automatic six-month extension due to the coronavirus. Individuals who were affected by the damaging wildfires were also given additional time to meet most tax deadlines. However, in 2021, the deadline for submitting your income tax return is scheduled for May 17th for federal tax filing. To avoid a potential late filing penalty, you need to be ready by this date. To prepare to file your 2020 income tax return, keep the following tips in mind.  1. Identify All Income Sources If you work for an employer, you will need to report the wages noted on your Form W-2 (Wage and Tax Statement). To avoid penalties, your employer is required to provide you with this form by the last day of January, but you can estimate the numbers by viewing your last paystub of the year. Since January 31st fell on a Sunday in 2021, employers had until February 1st to provide your Form W-2.1  As a small business owner, self-employed person, or freelancer, your income is your revenue (or 1099 income) minus your business expenses. However, instead of noting the final number on your return, you will need to fill out a schedule that displays both your revenue and expenses. It is important that you comb your records carefully to ensure all expenses are accounted for.  2. Decide If You Can Itemize Instead of paying income tax on all of your income, you’re able to deduct a certain amount of income and only pay tax on the remaining amount. All taxpayers are given the choice of claiming the standard deduction or itemizing. For the 2021 tax year, the standard deduction is $12,550 for

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Is the Roth 401(k) an Option for You?

Since it first became available in 2006, many employers have added the Roth 401(k) to their benefit packages as a retirement savings option. A Roth option is available for Individual Retirement Accounts (IRAs) and 401(k) and 403(b) accounts. To see if a Roth 401(k) would be appropriate for your situation, let’s take a closer look. To Roth or Not to Roth To start, let’s consider the advantages and disadvantages of both types of 401(k)s. With a traditional 401(k), you make contributions on a pre-tax basis, which lowers your current income subject to taxation, and earnings in the account have the potential to grow tax deferred. However, your distributions in retirement are subject to ordinary income tax. On the other hand, your contributions to a Roth 401(k) are made with after-tax dollars, but potential earnings and distributions are tax free, as long as you have held the account for at least five years and are at least 59½ years old. However, non-qualified distributions may be subject to income tax and a 10% early withdraw penalty may also apply. So, is it better to pay taxes on your retirement funds now or later? The most appropriate choice for you may depend on your current tax situation and your long-term financial goals. It is important to keep in mind that the 401(k) annual deferral limits – $19,500 for taxpayers under age 50 and $25,500 for those age 50 or older in 2021 – apply to all 401(k) contributions, regardless of whether they are made on a pre-tax or after-tax basis. If you contribute to a Roth 401(k), you may have to reduce or discontinue contributions to your employer’s traditional 401(k) plan to avoid

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What Should You Consider When Reviewing Your 2019 Tax Return?

Reviewing a tax return can be an informative exercise to ensure you understand all sources of income and tax liabilities for the prior year. Take a look at our checklists to make sure you know what items to review while you are doing your taxes:   Download Our Checklist for Retirees   Download Our Checklist for Someone Still Working           This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Puckett & Sturgill Financial Group and LPL Financial do not offer tax advice.  

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