Neglecting day-to-day financial health is often why people struggle to achieve their savings goals—financial self-checkup can help
3 min
In making financial goals for the new year, the approach many people tend to take is to go big. In doing so, they might be missing the small picture.
“These smaller goals become your true financial foundation, a solid base that is crucial for your financial success, especially when you start reaching and planning for the larger goals in life,” said Michaela McDonald, a financial-advice expert at Albert, a finance app.
Ms McDonald says many of her clients have asked for advice to help them achieve lofty financial objectives, but neglecting day-to-day financial health is often the reason people struggle to accomplish even half of their savings goals throughout the year.
For many, 2020 has been exhausting, so it might be tempting to write off little expenses and fees to eschew another headache. But small amounts can matter—here’s how to find and look at the tiny corners of your financial life without getting overwhelmed.
Joy Liu, a financial trainer at the Financial Gym, recommends tracking down all your accounts and debts—even the small ones.
“Sometimes, we can unintentionally have little accounts everywhere, so it might be a good indicator that you may need to streamline,” said Ms Liu.
Consolidating accounts can prevent you from being charged a maintenance fee on an account with a small amount that doesn’t meet balance requirements. Americans paid an average fee of $15.50 for not meeting the minimum amount for their interest checking accounts this year, according to Bankrate.com.
Tracking down small debts is crucial to your financial well-being as well. Ms Liu says the best way to do that is by pulling a full credit report to see if you have any unpaid debts. To order a free credit report, visit annualcreditreport.com. Federal law allows one free credit report from Equifax, Experian, and TransUnion a year.
“From there, it’s just opening that stack of unopened mail to track down the other stuff,” she said.
A popular way to save on a bit of interest is to take advantage of 0% offers for a new credit card or balance transfer. These promotions often require a transfer fee, then for a set number of months interest won’t be charged.
If you have taken out any 0% offers on a credit card on another type of loan in the last 12 months, even for a small amount, pay attention when those promotional periods end. There might also be an annual fee for the cards you didn’t have to pay when you initially signed up.
“Make sure you have a plan to either have it paid off by that time or maybe do a balance transfer without being charged interest unintentionally,” said Ms Liu.
Perform an audit of your subscriptions, especially the ones which will increase in price in the new year. Some of the most pernicious monthly charges are from apps and free-trials that people forget to cancel or pause.
These charges can quickly add up monthly and prevent people from making headway on their financial goals.
Tracking small expenses can be time-intensive. There is the traditional way of printing out your credit card statements and highlighting all small expenses under a certain threshold, but it might be easier to let a money app or spreadsheet do the work.
Keep track of small fees as well, for banking and investment accounts. Ms McDonald encourages people to enrol in autopay for bills and other monthly expenses to avoid late fees.
Whether you are using a low-fee robo adviser or a human adviser, check in on whether the management fees or account minimums will change in the new year and whether the difference is worth comparison shopping. If you have been paying a “teaser” fee to try out a new adviser or product, evaluate the results to see if you want to stay with it.
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
BNW Developments has established a Sydney presence, joining Arada and Sobha Realty among the growing number of UAE developers pursuing Australian buyers and development opportunities.
The Australian leather house has opened an immersive four-day pop-up in Manhattan, unveiling its Bloom Collection and redefining what a product launch can look like.
Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
4 min
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.
