Resources
USEful info. no financial jargon required.
Pain-free tax deductions guide for solopreneurs & independent contractors
Questions Worth Asking
whether working with professionals or doing it yourself.
BEFORE YOU SIGN
Whether for a home, a car or any other big purchase, the devil is in the details. Check for things like origination fees, prepayment penalties, late fees, and total interest.
All of these items can come as a big surprise when you least expect it. It’s best to know the rules of engagement before signing anything.
If they didn’t disclose it to you in conversation or casually said something to the effect of “it doesn’t cost you anything the company pays me”, then it is a commission-based product.
Don’t be shy to ask them exactly how much or what percentage they are compensated. Someone who is ethically selling you a product should have no problem disclosing their cut on the deal.
If they start to stammer and try to change the subject, that’s a red flag. If they truly feel a product is a good fit for you, then there should be no issue on being transparent on how much they make on the sale.
This also goes for a car dealership financial department person who is trying to upsell you on add-ons.
We must be very careful reading the terms of a 0% financing contract, whether it’s for a car, furniture, credit card transfers or medical bills.
With a 0% credit card balance transfer, you may still pay a 3-5% balance transfer fee.
If you use a 0% credit card from a furniture store, this may be deferred interest and this can be a bad surprise. If you don’t pay off your balance in the 0% window, then all of that deferred interest comes roaring back at a high rate AND on the original balance.
Always, always read the 0% financing fine print and if you don’t understand what it means, look up the terms and phrases you don’t understand on your phone before signing on the dotted line.
WHEN TAXES ENTER THE PICTURE
A tax deduction is something that reduces your taxable income.
A tax credit reduces your actual taxes.
The reason is withholding.
Bonuses of under $1million (which is like 99.9% of bonuses) have taxes withheld at a flat 22% for IRS.
If you are in the 12% tax bracket, you will have had too much tax taken out and may have a larger refund.
If you are in the 35% tax bracket, you will not have had enough tax withheld from your bonus and you most likely will owe IRS at tax time.
State withholding on bonuses will vary. Certain states, like NY, over withhold on bonuses so many people who work in NY and receive bonuses end up with NYS refunds.
Getting a refund simply means you paid in more tax over the year than your actual “tax burden” for the year.
If you want to understand why you have a refund or owe each year and are working with a tax professional, ask them. They should be able to parse out where the refund/balance due came from and how to change it going forward if you want to change it.
When You Don't Know Who to Trust
These terms are all used interchangeably but they have different purposes.
Financial advisors, financial planners and Certified Financial Planners (CFPs) are involved in some way in helping plan for financial goals. In order to give advice, they have different levels of licenses they are required to have in order to advise you.
If they have a fiduciary responsibility based on their licenses, then they have a legal obligation to put your best interests before their own commissions and compensation.
When it comes to personal finance, Certified Public Accountants (CPAs) and Enrolled Agents (EAs) are primarily involved in tax matters and tax planning. They can also be involved in business strategic planning beyond tax work.
If you are considering working with a financial advisor in the US, it’s an extremely good idea to visit FINRA’s Broker Check. It is a free service:
https://brokercheck.finra.org/
Here’s what you are looking for:
- How long has this person been an advisor?
- Which licenses do they hold?
- Which states are they licensed in?
- Do they have any disclosure items (i.e. complaints against them)? If so, read about them and see how comfortable you are (or not) with them.
- Anyone who tries to pressure you into purchasing a financial product or service.
- Anyone who shames you or talks down to you for not understanding.
- Anyone with questionable disclosure items (see FINRA link above)
- Anyone who will not be transparent about their fee schedules or compensation.
WHEN THINGS CHANGE
One of a few things happens:
- You get to keep whatever you contributed PLUS whatever portion of the EMPLOYER contribution is considered “vested” (i.e. yours to keep too).
- You leave it in the 401k until the old employer makes you move it somewhere else.
- You roll it over into an Individual Retirement Account (IRA) so you can manage it yourself or with a financial advisor.
- You roll it into the 401k at your new job so everything is in one place.
- You take a distribution of the 401k money and pay the taxes and associated early distribution penalties (if applicable).
- You forget about it and the money is turned over to the state as unclaimed funds.
Your HSA is yours to keep; it is in your name and can follow you wherever you go, no matter who your next employer is. You can keep it with the same custodian or move them somewhere else The funds roll over each year.
This is different than Flex Spending Accounts (health and childcare), because with FSAs, they are “use it or lose it” during the year or if you leave your job.
If you have workplace sponsored health insurance and you leave or lose your job, your insurance situation has just changed drastically.
If you worked for an employer with more than 20 employees, they are required to offer you COBRA to extend your same health insurance benefits even after you leave the company.
The catch is that you are responsible for paying both sides (the employer AND employee shares) of the premiums.
Depending on your age, state of residence, number of dependents on your policy, it might make more sense to buy private insurance or marketplace insurance in the interim.
If you are not sure, check with an independent health insurance agent to explore your options.
This can be a small oversight with catastrophic consequences.
You don’t want to be that person who forgot to take your ex-spouse’s name off the life insurance policy (unless it was in your divorce agreement that you have to keep it that way).
Double-check the beneficiaries on your life insurance, brokerage and retirement accounts after you:
- Get married
- Get divorced
- Have a child
- Have another child
- When one of your beneficiaries passes before you do
Make a list of all accounts that you have that might have a beneficiary on them and go check to make sure they are the people you intended.
BEFORE YOU INSURE
The “quick and dirty” answer is 8-10 times your income if you are employed or self-employed and re-evaluate every 3-5 years to see if you need to increase your coverage.
If you are a stay-at-home parent, having a policy to cover at minimum how much childcare would cost per year x the number of years childcare would be needed is a great start.
- Term Life Insurance:
You pay a fixed amount of coverage at a set premium for a certain number of years.After the term is up and if you are still alive, the fixed premiums increase exponentially each year or you let the policy lapse.
It is less expensive than permanent insurance because term insurance has an end date.
- Permanent Insurance (Whole Life or Universal Life):
Considerably more expensive but often includes a savings component and lifetime coverage.
But as long as you keep paying those premiums, the policy doesn’t lapse until you die.