Debt and Cash Flow
What are the three methods for paying down/off debt?
Financial – Pay highest interest rate debt first; lowers overall interest paid
Psychological – Pay down lowest balance first; feeling of accomplishment
Cash Flow – Pay off debt with highest monthly payment; improves your cash flow quickest
*All should be approached with the snowball strategy
For 2022, how much can I contribute into a 401(k)?
Under 50 by 2022 - 20,500
50 or older catchup 2022 - 6,500
*can do the catch up in the year they turn 50 or older
Please explain rebalancing and the benefits to rebalancing over time.
Over time, an investor’s portfolio asset-allocation can get disturbed by market ups and downs. For example, stocks tend to outperform bonds in the long run. Since stocks are riskier than bonds, a greater allocation in stocks can also increase portfolio risk. Rebalancing is an essential account-management tool that helps keep the portfolio within the risk tolerance level that is comfortable for the investor’s asset-allocation strategy.
Please compare standard deduction and itemized deduction. What are 3 examples of itemized deductions?
Itemized deductions - mortgage interest expense, state/local/real estate taxes (up to 10k), charitable contributions, and medical/dental expenses
Please compare a pre-paid tuition 529 to a college savings 529, including 2 pros and 2 cons for each plan.
- adv. deduction for state taxes possible, tax free growth for qualified expenses, investment returns, can change beneficiaries, acct. owner maintains control, k-12 flexibility, high contribution limits
- disadv. limited investment choices and ability to change it only so often, penalties/tax if not used for education, can impact financial aid eligibility
Prepaid Tuition Plans:
- adv. lock in today's cost, no investment risk for member,
- disadv. - state-specific, no investment returns,
What are some ways we can help someone with their cash flow besides debt management?
Properly saving (Roth vs. Traditional contributions), reviewing insurance coverage, tax withholding (more current cash flow vs. forced savings), medical expenses (using an FSA or HSA).
What are the major factors when choosing between Roth and pre-tax for contributions?
Taxes
Cash Flow
Time Horizon
Income
There are 5 major risks involved with investing. Please name three of them and describe them in detail.
Market risk
Inflation risk
Business/credit risk
Interest-rate risk
Political risk
What are FICA taxes and what are the percentages for both the employee and employer?
FICA tax is made up of social security and medicare contributions.
Employee - 6.2% of wages up to 147k for SS / 1.45% of wages uncapped for Medicare
Employer - 6.2% of wages up to 147k for SS / 1.45% of wages uncapped for Medicare
Self-employed - 12.4% of wages up to 147k for SS / 2.9% of wages uncapped for Medicare
How can a 529 plan affect Financial Aid?
Depends on who the owner is
►If parent owned, the assets are reported on the FAFSA as a parental asset, assessed at a maximum 5.64% rate in determining the EFC.
►If student owned, assessed at a maximum 5.64% rate in determining the EFS
What 5 aspects are used to build your credit score and which one has the greatest impact?
Types of credit in use (10%)
New credit (10%)
Length of credit history (15%)
Amounts owed (30%)
Payment history (35%)
John is a new State Farm employee and is needing some direction on how to save for retirement. He has a State Farm 401(k), a Vanguard IRA, and a brokerage account. What order should he prioritize his retirement contributions into these various accounts? Are there any other vehicles he could utilize for retirement?
401k up to employer match
Additional contributions to 401k or contributions to the IRA (pros/cons of each will need to be discussed)
Brokerage account last (don't have income limits or max contributions, but creates a taxable event when changing investments)
*Other considerations could be life insurance benefits, annuities, collectibles, real estate.
Please compare a growth stock to a value stock.
•Definition of growth stocks: Stocks whose return comes primarily from capital appreciation, with little or no dividend payouts; usually refers to companies with above-average growth in earnings that reinvest their profits into expansion, acquisitions and research and development.
•Definition of value stocks: Often called undervalued stocks, because they trade at a lower share price than the company's reputation, earnings outlook, or financial situation would seem to justify – in other words, they are perceived to be “selling at a bargain”. Investors who seek them out expect the company's fortunes – and more importantly, the market’s perception of them - to turn around, and the price of its stock to increase accordingly.
What is the difference between refundable vs. non-refundable credits? Please provide an example of each.
►Refundable: If credit exceeds your tax liability, you can still receive a refund
►Non-Refundable: Ability to reduce your taxes, but not below $0
Refundable - child tax credit, earn income credit (has limits), American Opp. Tax Credit (40% refundable)
Nonrefundable - adoption tax credit, child and dependent care credit, lifetime learning credit,
Coverdell ESA
- eligibility based on AGI, 2k per beneficiary, investable, tax-free withdrawals, child can take control at age of majority
Education Savings Bonds
-safe investment, 10k contributions, owner maintains control, good for conservative investors
Custodial Accounts
- investable, child takes control at age of majority, uncapped contributions, irrevocable contributions
Brokerage Accts.
- unlimited contributions, not education specific
Ashley is currently single and works for Colgate making $10,000 per month. She currently spends about $4,000/mo. Ashley calls in wanting to know if her $18,000 in her brokerage account is sufficient for an emergency savings fund. What would you tell her?
3-6 months of expenses is sufficient for an emergency savings account. If only one income stream, she will want to have 6 months worth equating to $24,000. Additionally, she may consider putting these monies into a more liquid and stable account like a savings account.
There are three types of employee contributions into retirement accounts. What are they? Explain the difference b/w the three. Which is the least advantageous? Which is the most advantageous?
Pre-tax - tax deduction today, tax-deferred growth, taxable at distribution
Roth - taxable at contribution, tax-deferred growth, tax-free in retirement (59.5 and 5 year holding period)
After-tax - taxable at contribution, tax-deferred growth, taxable at distribution
Least - after-tax
Best - depends on members situation.
What are the 4 asset classes we use for investing? What vehicles should we use for liquid savings? What is the rule of thumb for saving vs. investing?
Large cap U.S. stocks
Small/mid cap U.S. stocks
Foreign/international stocks
Bonds
Liquid savings - money market, checking account, savings acct, CD (cash and cash equivalents)
Rule of thumb - 5 year rule
Please explain the differences between a marginal tax rate and an effective tax rate.
►Marginal tax rate: The amount of tax paid on your last dollar of income. This rate is to be used when making financial decisions
►Effective tax rate: The average rate of tax paid. Tax paid / taxable income
DOUBLE JEOPARDY - Please converse with your teammates and determine your wagered amount.
How can a giftor gift monies to the giftee for education without hitting their annual gift limit?
EY employee, Roger, is age 60 and is ready to retire next month. He has $700,000 in his 401(k) and $82,000 left on his mortgage. He would like to know if he should go ahead and pay this off when he retires...what would you tell him?
Quantitative: Can they earn a ROR higher than the interest rate they are paying? Are they taking advantage of the tax deductions available for the interest on the mortgage?
Qualitative: Would they prefer to be debt free sooner rather than investing those monies?
Marc from EY was born on 08.02.1956. He would like to know when he can/could have started social security benefits, when his full retirement age is, and when is the latest he can collect social security benefits. Please provide this information and some guidance in terms of how to decide when he should collect.
Earliest - 62
FRA - 66 and 4 months
Latest - 70
Considerations:
- When do you need the money?
- What will you do with the money?
- Life expectancy?
- How much of your benefit is subject to taxation?
- Estate planning
DOUBLE JEOPARDY - Please converse with your teammates and determine your wagered amount.
A planning client and you run the Asset Allocation tool on EY Navigate. The client is distraught that the tool suggested 50% of the stock portion to be dedicated to a foreign stock fund. He has not seen any growth in his foreign accounts in recent years. How do you respond?
Marsha is a retired FRS member and she receives pension income, required minimum distributions from her IRA, and social security benefits. She calls in wanting to know if her social security benefit is taxable. (P.S. - she files her taxes as single)
It depends on her income but with those various income streams, more than likely a portion of her social security benefit will be taxable.
If MAGI is <25,000, 0% of SS will be subject to tax.
If MAGI is 25,000-34,000, up to 50% of SS will be subject to tax.
If MAGI is >34,000, up to 85% of SS will be subject to tax.
MAGI includes gross income, tax exempt income, and half of SS benefits.
Please compare the American Opportunity Credit and the Lifetime Learning Credit.
AOC and LLC are both for tuition and related expenses and has the same phase-out limits.
AOC:
- credit amount: 100% of the first 2,000/25% of the next 2,000 (max. 2500 per year per student)
- credit can be claimed first four years of higher education (must be at least half-time)
LLC:
- credit amount: 20% of the first 10k (max 2000 per year for all students)
- credit can be claimed any number of years, no minimum hour requirement