Paying for College Can Be a Family Affair

May 24, 2017
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College planning isn’t for parents only. It’s an investment that should involve the whole family and offer students their first taste of financial planning. It’s a time for parents to be realistic about what they can afford and for students to give serious thought to the value of a college education and where it will get them in life. Most important, an in-depth discussion requires families to sit down at the kitchen table and talk about money.

The psychological barriers to this discussion can be huge. Parents who think it’s their obligation to pay for their children’s college education (because their parents paid for theirs) are feeling guilty because they haven’t saved enough. Children who never had to worry about paying for things before and who want to preserve their childhood a little longer don’t think they should have to worry about where the money will come from. None of these attitudes will help get the FAFSA form filled out. Better to face the realities of college head-on now and use the experience as a lesson in financial planning.

Lesson 1: Goal Setting
Most families scrambling to pay for college may now regret not having set college goals earlier. Families will, however, need to adjust the goal-setting process to account for the fact that college is upon them and no longer a vague event some 18 years in the future. Once a child gets to high school, goal-setting needs to be practical and realistic. No pie-in-the-sky dreams about obtaining multiple degrees at private colleges. And it needs to involve the child.

Moreover, it should go beyond the four years of college to include career plans, income targets, and lifestyle goals to determine how much debt the student feels comfortable taking on. Will an elite private school pay for itself in higher postgraduate earnings? Or would the child prefer a less expensive school in order not to be burdened with debt and therefore free to pursue a lower paying career such as teaching?

The goal-setting process at this stage requires the student to think beyond college majors and freshman year beer busts and do some real life planning. While the choices may be difficult, the process is invaluable. The younger a person is when life-planning and goal-setting skills are developed, the more empowered that individual will feel throughout life.

Lesson 2: Tax-Deferred Compounding
Regrets often provide the greatest life lessons. It’s too late now for the parents of a high school senior to compound savings over 18 years, but they may be able to use this missed opportunity as a lesson in saving for their own retirement. And you can bet that a child with no college savings is determined never to come up short again, making this a perfect time to discuss some finance basics: save 10% of your income; max out your IRA; save up for what you want rather than going into debt.

Let’s not forget the compounding lesson, which paradoxically, is sometimes made more difficult by the large end-dollar amounts promised. For example, a young person can accumulate over $1 million in 50 years by saving just $150 per month at 8%. The financial services industry often holds these large amounts out as a carrot to motivate people to save, but they just make the monthly savings amount seem too pitiful to make a difference. One might as well blow it on the latest indulgence. But that $150 is the crucial seed that gets the whole ball rolling. In time, the earnings will represent a larger share of the whole, but only if the seed money is invested first. Perhaps the compounding lesson should focus on the amount going into the account, not the pot of gold at the end.

Lesson 3: Budgeting and Cash Flow
College is the perfect time to introduce young people to the essentials of budgeting. Even if credit cards, payment plans and parents help smooth out the cash flow, students should not go off to college without knowing how much everything will cost. The College Board breaks down college expenses into five categories: tuition and fees, room and board, books and supplies, personal expenses, and travel. If college is a few years away, families can use the average costs listed in the College Board’s “Trends in College Pricing” (http://trends. collegeboard.org/college pricing) to develop a preliminary budget and make basic decisions about which type of college to go to, private vs. public, instate or out, and so on.

Even so, families will need to consider their own individual circumstances. Will parents visit the school several times throughout the year? (Add airfare and hotel/meal costs.) Will the child have a car at school? (Add insurance, gas, parking, and maintenance costs.) Will the child go to Miami for spring break? (Not exactly a college expense, but it should be part of the budget.) Even if parents are able and willing to pay for everything, the off-to-college budgeting exercise is a meaningful way to prepare kids for the financial responsibilities of life. And no matter how tight or loose the budget is, it never hurts to look for ways to reduce college costs.

Lesson 4: Debt Management
Any child who has ever borrowed money from his parents has had some experience with debt. But it probably didn’t involve interest or fees and it certainly didn’t introduce the child to the nation’s most unforgiving lender, Uncle Sam. Student loans seem so magnanimous at first—no payments till after graduation and forbearances relatively easy to obtain—but once the money is borrowed, the debt must be managed with care, because default is not an option.
The principles of debt management seem obvious to adults, but children swept up in the financial aid game need to learn them: don’t borrow more than you can afford to repay, shop around for the best rates and terms, and understand the full cost of the loan over the entire payment period. Loan consolidation, for example, may seem like a good deal until you calculate the total interest over the life of the loan. Students will need to be reminded that many of those nice student aid people who are helping them obtain money for college are really in the business of selling loans and may not have students’ best interests at heart.

Next to retirement, college planning is one of the most serious aspects of financial planning, because it influences a young adult’s total lifetime earnings. The type of degree, where it comes from, and the people the student meets in college all help shape the career direction and opportunities the student will have in life. The planning process may be considered an important part of the student’s education, as it prepares the student for the many financial- and life-planning issues that will come up in the years ahead.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

10 Tips For Maximizing Financial Aid For College Students


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Every year the College Board faces a public relations challenge: how to accurately report trends in college pricing without discouraging high school students from going on to college. So in addition to its annual booklet “Trends in College Pricing,” the College Board publishes the annual report “Trends in Student Aid,” which describes the widespread availability of money for college.

Both publications run 40 pages or more. And to make sure students and parents understand why they should spend all this money or take out all these loans, there’s the report “Education Pays,” which offers a cost-benefit analysis in its 50 or so pages. The typical bachelor’s degree recipient can expect to earn about 60% more annually than the typical high school graduate, according to a 2014 report by the Bureau of Labor Statistics. Or, to put it another way, by the age of 36, the typical college graduate who enrolled at age 18 has earned enough to compensate for not only tuition and fees at the average. Average cost of a college education. So what does it cost to achieve this lifetime enhancement? The average cost of college (tuition, fees, room, and board) is around $19,000 for in-state public schools and $43,000 for private, as reported by the College Board. Keep in mind that these are averages. Also keep in mind that these amounts are for one year of college only. To plan accurately for college costs, it’s best to 1) identify the college the student is likely to attend and use those numbers; 2) multiply the one-year cost by 4 (or even 5); and 3) add an inflation factor.

Applying for student aid your income may lead you to think it’s not worth the trouble of applying for student aid. But because a greater portion of institutional grants is now going to higher-income families, and because subsidized loans offer such attractive rates and terms, anyone with a child enrolling in college should fill out the FAFSA (Free Application for Federal Student Aid at www.fafsa.ed.gov). College tuition is so expensive that even high-income families can get offers of financial aid. Your first step is to complete the federal forms, and then contact the school directly to further negotiate a financial aid package.

Even parents with students who are several years away from college should become familiar with the FAFSA so they can rearrange their affairs if necessary, perhaps contributing more to retirement plans (which are considered exempt assets) or spending down UGMA/UTMA accounts so those assets won’t raise the expected family contribution (caution: UGMA assets must be spent on the child and may not be for necessities; summer camp, cars, and computers are OK). Also, remember that the FAFSA must be submitted every year that the child is enrolled.

Here are some tips for filling out the FAFSA:

  1. Do it early. At many schools financial aid is distributed on a first-come, first-serve basis. Although the federal deadline on the form is June 30, the aid deadline set by individual schools could be as early as the end of February. Deadlines for state aid also vary. And although it asks for the prior year tax information, which may not be in yet, financial aid counselors advise using estimates or basing the figures on last year’s tax return rather than waiting.
  2. Do it online. Because of the FAFSA’s complexity, it’s common for people to make mistakes when filling it out. Paper applications with errors or missing information will be returned for corrections; therefore, their processing will be delayed. The online version of the form issues an alert for missing information and even recognizes some obvious errors.
  3. Do not include exempt assets. Retirement plans and home equity are exempt assets and should not be included in net worth information on the FAFSA.
  4. Keep all records. Make a copy of the completed application and save it, along with all records used to complete the FAFSA. Not only will this help in filing next year’s form, but documentation may need to be produced if yours is one of those selected for verification. The U.S. Department of Education checks FAFSA information against data from the Social Security Administration, the Veterans Administration, and the Internal Revenue Service. It also selects about one-third of all applications for verification.
  5. Read all questions carefully. The words “you” and “your” refer to the student, not the parents. Do not leave any answers blank. If the answer is “zero” or “not applicable,” enter “0” or “N/A.”
  6. Do not send letters of explanation with the FAFSA. Although it is a good idea to make financial aid officers aware of any unusual circumstances, such as a job loss or reduced income, such letters should be directed to individual schools. If they are attached to the application, they will be thrown away. General tips on maximizing student aid. Apart from the FAFSA, parents may want to contact the financial aid departments at individual schools to increase their chances of receiving a favorable financial aid package.
  7. Don’t discount expensive schools. Some families automatically cross high-tuition schools off their list. But interestingly, those colleges may actually be more affordable because they are often well endowed and can meet more of the need.
  8. Reconsider early decision. Some schools allow students to get a jump on the application process if they will commit to attending if admitted. While this may help the student’s chances of getting in, it could reduce the amount of aid that is offered, because of the student’s reduced bargaining position.
  9. Ask for a review. To try to receive a better aid package, ask that it be reviewed. Avoid using the words “bargain” or “negotiate,” however; financial aid officers do not like being put in that position, and they especially hate having offers from competing colleges waved in their faces. Counselors advise thanking the school for its generosity and then expressing doubt at being able to meet the family’s expected contribution as a way to ask for more aid.
  10. If outside scholarships come in, ask that loans be reduced first. Some students have discovered that outside scholarships from community organizations such as the Rotary Club end up going straight to the college. That’s because the grant portion of the aid package is reduced dollar for dollar by the amount of the scholarship. Ask that any outside scholarships be applied against the loan portion of the package.

The availability of student aid should not keep parents from saving for college. But because grants and loans are such an essential part of college financing today, even high-income families, who aren’t used to appealing for financial help, will probably want to participate in the student aid game rather than automatically writing checks to their kid’s college.

What is the Right Formula for Funding Education?


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Education is truly an investment for a lifetime.  The gift of a college education can open the door to a world of opportunity for your child or grandchild.  Saving, even a little at a time, can make a big difference down the road.  With the cost of a college education continuing to increase, the key is to start saving early and regularly. There are many different methods to fund education expenses.  Determining the best method for your family should first start with an honest conversation regarding your goals.  At HFG Wealth Management, we utilize the life planning approach; our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values.

Ask yourself:

  1. How much of my children’s or grandchildren’s education do I want to fund?
  2. What is a feasible savings amount based on my financial situation?
  3. Which other funding methods (i.e. scholarships, work-study, student loans, financial aid) are likely to play a part in funding education?

Once these key questions are answered, a plan can be implemented to fund education.  I have provided some helpful information on the various education funding methods that you may want to use to begin the planning process:

529 Plans 

529 plans are one of the most popular tax-advantaged college savings options.  They include both college savings plans and prepaid tuition plans.  With either type of plan, your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified college expenses.  Each state may also offer their own tax advantages.  With a college savings plan, you open an individual investment account and select one or more of the plan’s mutual fund portfolios for your contributions.  With a prepaid tuition plan, you can purchase tuition credits at today’s prices for use at specific colleges in the future and there’s no individual investment component.  With either type of plan, participation isn’t restricted by income, and the lifetime contribution limits are high, especially for college savings plans.

Coverdell Education Savings Accounts 

A Coverdell education savings account is a tax-advantaged education savings vehicle that lets you contribute up to $2,000 per year.  Your contributions grow tax deferred and earnings are tax free at the federal level (and most states follow the federal tax treatment) if the money is used for the    beneficiary’s qualified elementary, secondary or college expenses.  You have complete control over the investments you hold in the account, but there are income restrictions on who can participate.

U.S. Savings Bonds 

The interest earned on Series EE and Series I saving bonds is exempt from federal income tax if the bond proceeds are used for qualified college expenses.  These bonds earn a guaranteed, modest rate     of return, and they are easily purchased at most financial institutions or online at www.treasurydirect.gov.  However, to qualify for tax-free interest, you must meet income limits and other established criteria.

UTMA/UGMA Custodial Account

An UTMA/UGMA custodial account is a way for your child to hold assets in his or her own name with you (or another individual) acting as custodian.  Assets in the account can then be used to pay for college.  All contributions to the account are irrevocable, and your child will gain control of the account when he or she turns 21 (varies state to state).  Earnings and capital gains generated by assets in the account are taxed to the child each year.  Under the kiddie tax rules, for children under age 19 and for full-time students under age 24 who don’t earn more than one-half of their support, the first $1,050 of earned income is tax free, the next $1,050 is taxed at the child’s rate and anything over $2,100 is taxed at your rate.

Financial Aid

Many families rely on some form of financial aid to pay for college.   Loans and work-study jobs must be repaid (either through monetary or work obligations), while grants and scholarships do not.  Most financial aid is based on need, which the federal government and colleges determine primarily by your   income, but also by your assets and personal information reported on your aid applications.  In recent years, merit aid has been making a comeback, so this can be really good news if your child has a special talent or skill.

It is most likely a combination of the education funding methods above will be utilized in order to meet your own family’s education goals.  We recommend custom tailoring an education funding plan based on your family’s needs.  Additionally, the plan should be reviewed on a periodic basis and adjustments made accordingly.

At HFG Wealth Management, we embrace a more holistic method of financial planning known as Financial Life Planning™.  We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan.  As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values.  At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future.  We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage.  For more information, please visit www.hfgwm.com or call 832.585.0110

 

HFG Wealth Management Welcomes Chuck DeAses, Interim COO and Wesley Chan, Financial Planning Specialist

May 11, 2017
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Larry Harvey, Founder and CEO of HFG Wealth Management, LLC is pleased to announce Chuck DeAses, has rejoined the firm as Interim COO and Wesley J. Chan, J.D. has joined the firm as a Financial Planning Specialist.
As a management consultant, Chuck is responsible for assisting the firm’s executive team with strategic objectives and act in an advisory capacity to the Founder and CEO. He also serves as an intermediary between the team leaders and management as the point person in exploring strategic partnerships and acquisitions.

Wesley has past experience with Pricewaterhouse Coopers and Wolters Kluwer Financial Services FRSGlobal. Wesley holds a B.B.A in Finance from University of Houston, C.T. Bauer College of Business and received a J.D. and M.S. in Personal Financial Planning from Texas Tech University. Wesley minored in International Business while studying abroad at Shanghai University.

Larry Harvey, Chief Executive Officer of HFG Wealth Management said, “Chuck has the unique perspective of previous experience with our firm and can offer insight and guidance into the firm that has been instrumental to HFG, and we are extremely pleased that he is returning.” Harvey continued, “The continued addition of our hires is a sign of an extremely strong management team and growing future. I confident Wesley will continue our model of high quality service to best serve the firm and our clients and brings unique experience to the team.”

HFG Wealth Management is an independent, fee-only, comprehensive financial planning and wealth advisory firm headquartered in The Woodlands, Texas, serving clients nationwide. Led by Founder and CEO Larry A. Harvey, ChFC® HFG Wealth Management has integrated financial life planning and investment management services into a customizable wealth management offering. Mr. Harvey currently serves as the firm’s President and Senior Wealth Advisor and also serves on the boards of various companies and is a sought-after advisor, lending his vast knowledge and years of experience to those firms. Today, HFG Wealth Management is dedicated to providing family office services to affluent individuals, families and business owners nationwide.

For more information about HFG, please visit www.hfgwm.com or call 832-585.0110

College Funding Options

May 10, 2017
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You can plan to meet the costs through a variety of methods.

How can you cover your child’s future college costs? Saving early (and often) may be the key for most families. Here are some college savings vehicles to consider.

529 plans. Offered by states and even some educational institutions, these plans let you save up to $14,000 per year for your child’s college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer you options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country.

While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences.  Additionally, grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.

Coverdell ESAs. Single filers with adjusted gross income (AGI) of $95,000 or less and joint filers with AGI of $190,000 or less can pour up to $2,000 annually into these tax-advantaged accounts. While the annual contribution ceiling is much lower than that of a 529 plan, Coverdell ESA’s have perks that 529 plans lack. Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses. Coverdell ESA’s may offer a broader variety of investment options compared to many 529 plans, and plan fees are also commonly lower.

Contributions to Coverdell ESAs’ aren’t tax-deductible, but the account enjoys tax-deferred growth and withdrawals are tax-free so long as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30 (there is a 30-day grace period), or taxes and penalties will be incurred. Money from a Coverdell ESA may even be rolled over tax-free into a 529 plan (but 529 plan money may not be rolled over into a Coverdell ESA).

UGMA & UTMA accounts. These all-purpose savings and investment accounts are often used to save for college. When you put money in the account, you are making an irrevocable gift to your child. You manage the account assets. When your child reaches the “age of majority” (usually 18 or 21, as defined by state UGMA or UTMA law), he or she can use the money to pay for college; however, once that age is reached, that child can also use the money to pay for anything else.

Cash value life insurance. If you have a “cash-rich” permanent life insurance policy, you can take a loan from (or even cash out) the policy to meet college costs. The principal portions of these loans are tax-exempt in most instances. Should you fail to repay the loan balance, however, the policy’s death benefit will be lower. Did you know that the value of a life insurance policy is not factored into a student’s financial aid calculation? That stands in contrast to 529 plan funds, which are categorized as a parental asset, even if the child owns the plan.

Imagine your child graduating from college debt-free. With the right kind of college planning, that may happen.   At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

How Parent & Child Assets Impact Financial Aid Packages


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Parents with investments and home equity generally find it harder to get financial aid for their college-bound children. But if you understand how assets are assessed on the FAFSA and CSS Financial Aid PROFILE, you can improve your chances for getting the best financial aid package possible. Do you know how your investments might reduce your chances for financial aid?  And what about the role that your family’s home equity plays in determining whether your child will receive financial help from a college?

When their children are little, parents often feel virtuous about saving for college, but when the college years are approaching, they often begin to view their college accounts and other investments as if they were time bombs with short fuses. Parents frequently assume that their assets will wreck their chances for financial aid. But parental fears about their investments are usually worse than the reality behind the role that assets play in their financial aid determinations.

Assets and financial aid applications

Whether your assets will hurt your financial aid prospects depends in part on what financial aid application(s) each school uses. There are the two main applications:

The free application for Federal Student Aid (FAFSA). All colleges and universities use the Free Application for Federal Student Aid (FAFSA) to determine if a student qualifies for federal and/or state financial aid. Most schools also use FAFSA to decide if a student qualifies for financial help from their own institutions. Nearly all public institutions and many private colleges find it sufficient to rely solely on the FAFSA.

CSS/Financial Aid PROFILE. Roughly 260 colleges and universities (nearly all of them private) require families seeking financial aid to complete an additional aid application called the CSS/Financial Aid PROFILE. Highly selective schools, such as the Ivy League, Stanford, MIT, and Amherst, use the PROFILE.

How FAFSA treats assets

Let’s first take a look at how assets fare under the FAFSA aid calculations. Many families will be pleasantly surprised that with the FAFSA, their investments make little or no impact on their children’s chances for need-based help. That’s because FAFSA ignores some assets, including the two biggest for many families: home equity and qualified retirement accounts.

Here are the assets that FAFSA ignores and parents do not need to include in their application:

  • Equity in a primary home
  • Qualified retirement assets, including: Traditional and rollover IRAs
  • Roth IRAs
  • SEP-IRAs
  • 401(k), 403(b), 457(b)
  • SIMPLE
  • KEOGH
  • Pension plans
  • Annuities (qualified and nonqualified)
  • Cash value in life insurance

While retirement accounts are safe, other assets are not. The following are those assets FAFSA does assess in determining eligibility for financial aid: All taxable accounts including:

  • Certificates of deposit
  • Savings and checking accounts
  • Commodities
  • Equity in property other than primary residence
  • College Accounts 529 college plans
  • Coverdell Education Savings Accounts
  • UGMA/UTMA custodial accounts (considered children’s assets)
  • Stocks
  • Bonds
  • Mutual Funds

How parents’ vs. children’s assets are assessed

The FAFSA formula assesses relevant parent assets at a maximum of 5.64%. The federal formula assesses child assets, which would include all custodial accounts as well as a child’s own savings/ checking, at 20%. The federal formula treats child assets more harshly because students are expected to contribute more of their money to pay for their college years.  For financial aid purposes, it could possibly be better to have money held in the parents’ names rather than the child’s. However, the child assets shouldn’t pose a problem if a family isn’t going to qualify for need-based aid because of high parental assets and income. It’s also always important to look for schools that provide merit scholarships for high-income students—and luckily most do.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

Job Changes… How Do You Roll With It?

May 4, 2017
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If you’ve changed employers, you may be wondering what to do with your 401(k) plan. It’s important to understand your options. You should ask yourself the following questions:

  1. Do I have all of the information needed to make an informed decision?
  2. What are the implications of my decision?

If you leave your company, you’ll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pre-tax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions and earnings that have satisfied your plan’s vesting schedule. Depending how your particular plan’s vesting schedule works, you’ll forfeit any employer contributions that haven’t vested by the time you change employers. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving your company.

Don’t Spend It, Roll It!
While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. Additionally, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. Special rules may apply if you receive a lump-sum distribution and you were born before 1936, or if the lump-sum includes employer stock.

If your vested balance is more than $5,000, you can leave your money in your employer’s plan until you reach normal retirement age, but your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan. In a direct rollover, the money passes directly from your 401(k) plan account to the IRA or other plan.

Reasons to Roll Over to an IRA:
You generally have more investment choices with an IRA than with an employer’s 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer-sponsored plans typically give you a limited menu of investments from which to choose.

An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions is generally at your discretion (until you reach age 70½ and must start taking required minimum distributions in the case of a traditional IRA).

You can roll over (essentially “convert”) your 401(k) plan distribution to a Roth IRA. You’ll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax free.

Reasons to Roll Over to Your new Employer’s 401(K) Plan:
Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can’t borrow from an IRA—you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties. You can, however, give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days.)

You may be able to postpone required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 70½. However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.

Finally, when evaluating whether to initiate a rollover, always be sure to:

  1. Ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose.
  2. Compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any).
  3. Understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

The information above is intended to assist in making an informed decision, but consult your own advisor or contact HFG Wealth Management for a consultation. At HFG Wealth Management, we embrace a more holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110

An Overview of Asset Strategies


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Asset transfers are an important part of financial planning. As you move through life, you are constantly acquiring and disposing of assets until that final transfer takes place—the one you’re not around to see.  You may need to transfer assets for all sorts of reasons. A working knowledge of various transfer techniques can help you determine when it’s appropriate to move money around. Some asset transfers are initiated as a result of a life event or other major decision. Others are suggested by attorneys or financial advisors as a way to better arrange your affairs. Some asset transfers are as easy as handing a tangible item over to another individual.

Here is an overview of asset transfers—the tip of the iceberg, if you will. Many of the regulations governing asset transfers are state laws, so your best bet is to check with your financial advisor and a good attorney—several of them, actually, in different specialties—who can guide you through the transfer process.

There are lots of reasons why people transfer assets. Here are some of them.

  • Marriage or cohabitation. You want to put a new spouse or partner’s name on the title.
  • A couple wants to divide joint property between the two spouses and retitle it in separate names.
  • Buyout (or sale to) co-owner. One of two co-owners wants to own full rights to the asset.
  • Anticipation of incapacity or death. An elderly person wants to put a son or daughter on the title for ease of transfer.
  • Establishment of a trust. There are many reasons for forming a trust; assets must be retitled in order to be transferred into the trust.
  • Establishment of a private annuity. You need income and want to keep assets in the family; assets are sold to family members in exchange for regular payments.
  • Reduction of estate taxes. You may want to remove assets from your estate in order to reduce the amount subject to estate tax.
  • Reduction of income taxes. You may want to transfer assets to a low-bracket family member so investment earnings will be taxed at a lower rate.
  • Medicaid eligibility. You may want to reduce the amount of “countable assets” so that Medicaid will pay for nursing home care.
  • You may need to meet the state’s asset requirement laws in order to discharge debts or other obligations.
  • Anticipation of lawsuits. You might need to protect assets from judgments (applicable to people in high-risk occupations, such as surgeons).
  • You may want to gift securities or other property to an individual or to charity.
  • Cash or asset exchange. You may want to sell an asset for cash and/or buy a different asset.

It would seem that if an individual wants to get rid of an asset or if two individuals want to enter into a private transaction, they ought to be able to do it with ease. For smaller transactions, they can. For instance, gift giving at birthdays and holidays would normally be exempt from asset-transfer laws.

In some transfer situations, however, there’s opportunity for tax evasion, taking advantage of people, or exploiting laws that are designed to help the needy. In those cases, certain procedures must be followed. And to make sure they are, the transfer process itself—the physical transfer of title to another person—may be extremely complex and not possible to complete without the help of an attorney, escrow officer, transfer agent, or other intermediary. Even so, the intermediary arranging for the transfer may not be obligated to warn clients of the various tax and legal ramifications—in some cases he or she may simply be following instructions to transfer title—so it is up to you to know the law or obtain legal counsel.

Here are a few of the common considerations involved in asset transfers:

Gift tax

If you are thinking about transferring assets to family members to save income or estate taxes or to facilitate transfer later on, then you should be aware of gift tax rules. In 2016, any gift to an individual that exceeds $14,000 for the year ($28,000 for joint gifts by married couples) applies against the lifetime gift tax exclusion and requires the filing of.  Form 709 for the year in which the gift was made. The gift tax does not need to be paid at the time Form 709 is filed, unless the client has exceeded the lifetime gift tax exclusion of $5.45 million in 2016 (adjusted annually for inflation).

The annual gift tax exclusion—the amount that may be given away without eating into the lifetime exclusion—is adjusted for inflation in $1,000 increments. Transfers to spouses who are U.S. citizens and to charitable organizations are exempt from gift tax. Payments made directly to an educational or health care institution are also exempt from gift tax. Property exchanged for equivalent value (as in a sale to another party) is not subject to gift tax. However, low-interest loans to family members may be subject to gift tax. Complicated transactions like these require advice.

Kiddie tax

The practice of transferring assets to children to avoid income tax on investment earnings is less popular now, because for 2016 investment income exceeding $2,100 earned by qualified children is taxed at the parents’ rate. The first $1,050 is tax free, the next $1,050 is taxed at the child’s rate, and the remaining income is taxable to the parents. The kiddie tax is also subject to inflation adjustments in $50 increments. It’s certainly possible to get around the kiddie tax by investing in assets that don’t pay current income—but then what’s the point of transferring assets to children, especially when parents must think about funding college.

Financial aid

The formula that determines need-based aid factors is a much higher percentage of assets when they belong to children (20%) as opposed to parents (5.64%). So the classic financial aid strategy is to keep assets away from children and haave parents’ assets in retirement plans, home equity and other exempt assets.

What if a child already has significant assets—say, in an UGMA or UTMA account? Is there any way to get them out of the child’s name? Probably not at least not until the child turns 18 or 21 and has the legal authority to transfer property. But by then it may be too late for financial aid, since schools look at the family’s financial picture as early as the student’s junior year of high school. Any parent who wants to maintain maximum financial aid flexibility (and this includes need-based scholarships, not just loans) should think twice before transferring assets to children.

Medicaid

Medicaid is designed for people with few assets who can’t afford to pay for custodial care. In the past, people had to “spend down” to such small amounts that often the healthy spouse was left nearly destitute. This led to rampant asset transfers and big business in “Medicaid planning.” However, the laws have been liberalized in recent years to better protect the healthy spouse, so asset-transfer gimmicks have waned somewhat. In any case, clients contemplating asset transfers in anticipation of applying for Medicaid need to be aware of “look back” laws—60 months for transfers to individuals (with some exceptions if the transfer is to a child under 21 or a child of any age who is blind or disabled) and trusts.

Bankruptcy

Each state has its own laws relating to how much property a client can keep and still discharge debts in bankruptcy. These laws also address property. The main point to understand is that asset transfers may not be as straightforward as you think, and some transfers may have unintended consequences. At the same time, strategies you may not have considered could provide the perfect financial planning tools. At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values.

At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

Five Questions To Ask Before You Retire


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retirement

The first step in any retirement income plan is to envision your retirement and make some decisions about how you will live. If the numbers don’t support the life you have in mind, now is the time to find out. Adjustments can always be made, whether it means working a little longer now in order to avoid working later, or scaling back your lifestyle in order to retire a little sooner. The more accurately you can answer these questions, the more likely you are to create a retirement income plan that will sustain you throughout life.

Where will you live?
The answer to this question affects not only housing costs, but other living costs as well. Whether you choose to move or stay put, consider the following:

  • Proximity to children and grandchildren. If you live far away from the kids, you’ll need to build travel costs into your budget and/or have extra space in your home for when the family comes to visit.
  • Affordability. Many people opt for more affordable living costs when they retire. Key factors in assessing a location’s living costs are the price of housing; the cost of food, utilities and transportation; and taxes (state income tax, property tax and sales tax).
  • Employment and business opportunities. If you plan to work during retirement, consider the job market for the type of work you want to do, or the business climate if you plan on starting a new business. This factor is often contrary to affordability: the towns with the lowest cost of living generally have the most limited employment and business opportunities; if you are looking for work that pays well or an active market for your product or service, you may have to choose a less affordable city.
  • Travel plans. If travel is expected to play a big part in your retirement plans, you might opt for an inexpensive condo near the airport (with no plants or pets), at least until the wanderlust subsides. If and when it does, you can reconsider the housing question again.
  • General preferences. Otherwise, consider the classic criteria for choosing retirement location. These include climate, cultural and recreational opportunities, access to medical care and other lifestyle issues.

What will you do?
How you plan to spend your time in retirement will largely determine how much income you’ll need. One way to look at this is to ask if your anticipated activities will add to the expense side or the income side of your retirement budget.

  • Expense-generating activities. The classic life of leisure can be expensive! Unless you plan to spend your days reading, walking and visiting with friends, you may be facing higher than-anticipated costs for travel, hobbies, and entertainment. Even classic low-cost activities such as gardening have associated expenses. This is not to say you shouldn’t enjoy yourself during retirement; it’s just that these expenses will have to be factored into the budget.
  • Income-generating activities. If you like to work, why not make that one of your primary activities during retirement? It’ll save money on hobbies and entertainment and generate income to boot. Even volunteer work pays off if it keeps you from engaging in expensive activities. If one of your goals is to start a business in retirement, hopefully it will count as an income generating activity. But you may need to prepare for several years of start-up expenses before the business becomes profitable.

How well will you live?
Living well is in the mind of the beholder. As you contemplate retirement, consider how you will live your life.

  • The simple life. Some retirees look forward to scaling back in retirement in order to reduce expenses and have what they would deem a very rich life. Grow your own vegetables. Prepare meals at home. Ride your bike. Take long walks. Read good books. You can do a lot with a little. Whether it arises from lifestyle choice or financial need, the simple life holds appeal for many.
  • The high life. On the other hand, some retirees who have been chained to an office for several decades may see retirement as their chance to live it up. Backed by a healthy retirement account and the income to support their chosen lifestyle, they may eat out more, take more vacations, explore expensive hobbies and generally live their dream. If you can afford the high life, more power to you.

How long do you expect to live?
This is the million-dollar question that, if answerable, would make retirement planning so much easier. Unfortunately, people are often misled by tables that show the median life expectancy. It has virtually no bearing on any individual’s true life expectancy. The safe route is to plan for retirement income to last to age 95 or 100.

What surprises does life hold in store? What unexpected events might you anticipate as you move through life?

  • Your health. Your genes, your health history and your lifestyle may provide some clues as to how your health will hold up as you grow older, but this is always a wild card in retirement planning. Fortunately, Medicare and supplemental insurance can take care of the major costs. Ironically, the healthier you are, the more likely you are to need long-term care later in life as the frailties that come with natural aging prevent you from performing activities of daily living such as bathing and dressing. It is often the oldest of the old who need the custodial care at the end of life. Medicare does not pay for this.
  • Your family. You never know when a family member might need your help. If your parents are still living, one or both might need personal or financial support as they age. And your children aren’t immune to life’s surprises either. A job loss, divorce, or health shock could send them to you for help just when you think your life is on an even keel. On the bright side, another grandchild or three could demand resources from you in a good way, depending on how generous you want to be.
  • The economy. Some say the financial crisis of 2008 was predictable; others say they never saw it coming. The lesson that came out of it is that anything can happen, including events beyond our wildest imagination. Adaptability is the key to managing life and money in the 21st Century. Pay attention and be ready to respond.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

Robo-Advisors vs. Human Advisors

April 24, 2017
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Investors have a choice today that they did not have a decade ago. They can seek investing and retirement planning guidance from a human financial advisor or put their invested assets in the hands of a robo-advisor – a software program that maintains their portfolio.

Why would an investor want to leave all that decision making up to a computer? In this era of cybercrime and “flash crashes” on Wall Street, doesn’t that seem a little chancy?  No, not to the financial firms touting robo-advisors. They are wooing millennials, in particular. Some robo-advisor accounts offer very low minimums and fees, and younger investors who want to “set it and forget it” or have their asset allocations gradually adjusted with time represent the prime market.

A cost-conscious investor may ask, “What’s so bad about using a robo-advisor?” After all, taxpayers and tax preparers use tax prep software to fill out 1040 forms each year, and that seems to work well. Why shouldn’t investors rely on investment software?

The problem is the lack of a human element. Investors at all stages of life appreciate when a financial professional takes time to understand them, to know their goals and their story. A software program cannot gain that understanding, even with input from a questionnaire.

The closer you get to retirement age, the less appealing a robo-advisor becomes. The software can’t yet perform retirement planning – and after 50, people have financial concerns far beyond investment yields. Software planning does not equal retirement planning, estate planning or risk management.

Additionally, robo-advisors have never faced a down market. They first appeared in 2010. Passive investment management is one of their hallmarks. How skillfully will their algorithms respond and rebalance a portfolio when the bears come out?

Does a robo-advisor have a fiduciary duty? Many investment and retirement planning professionals assume a fiduciary role for their clients. They have an ethical and legal duty to provide advice that is in the client’s best interest. How many robo-advisors have developed the discernment to do this?

The robo-advisor “revolution” may be fleeting. Why, exactly? The whole robo-advisor business model may invite the demise of many of these firms. Ultimately, robo-advisors may be remembered for the way they stimulated the financial services giants to offer low-minimum, low-cost investment tools. It appears the traditional approach of working with a human financial advisor may be hard to disrupt. The opportunity to draw on experience, to have a conversation with a professional who has seen his or her clients go through the whole arc of retirement, is so essential.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.