4th Quarter Money Moves for Business Owners

By: Kate Welker, CFP®

An Entrepreneurship's Journey

By: Amy Irvine, CFP®, EA, MPAS®, CCFC 

Five Years of Independence and Entrepreneurship!
June 1, 2020 celebrated FIVE years of independence and becoming an entrepreneur.  I can hardly believe it's been that long.  It's been an interesting journey to say the least.  For those of you that were with me at the start of the journey, the words, "thank you" don't seem sufficient enough words.  For those of you have have joined us along the way, we are so honored you've selected us.  

Starting your own business is hard work, I new it would be when I set off on the journey.  Typical to my personality, I planned for "what could go wrong" and worried about it all the time.  I will admit, it certainly started out a little rocky with significant challenges, as some of you may remember the flash crash of August 2015. 

This was then followed by a decision in early 2016 to create Irvine Wealth Planning Strategies (spinning off from the partnership I had started initially)  This was a hard decision, but was one of the best pivots I made early on and 2016 and 2017 were major growth years for the business, moving from 66 clients at the end of 2016 to 118 clients at the end of 2017.  Yes, that is a 44% growth rate in one year.  I remember being on a podcast and being asked how other's could replicate my "success" and my response was "don't."  That was too much growth and all I did was work VERY long days.

It was also in 2016 that "Monday Morning Quarter-Buck" was "born."  Yes we have over 4-years worth of blogs out in the world, for which I'm very excited and never would have thought possible.

In 2017, we launched the Wine and Dime Podcast, with the first episode releasing on September 22!  It was an episode with my mom.  We've come a long way from those early episodes and with the release of episode 116 this past Friday (see below).  

That's why 2018 was a big hiring year, with the first addition being Kate Welker in February of 2018.  I'm sure Kate would have some funny "stories" about those early days!  As would  Becky Eason who joined us shortly thereafter in April of 2018, and then Kerrie Beene in August of 2018.  Hiring people is one of the most stressful parts of running a company, the realization that their success is dependent on my success.  It's one thing to be a financial planner and understand how clients are leaning on you for guidance and advice, but when you put that business owner's hat on, it's a completely different grape you are tasting (yes, I had to get at least one wine related metaphor in here).  But, helping develop people certainly has made some awesome wine (okay two metaphors).

With the expansion of the team in 2018, we decided to re-brand in 2019 and Irvine Wealth Planning Strategies began doing business as Rooted Planning Group.  If you are a small business and ever want to re-brand, give us a call, we will tell what not to do!  We thought it was going to be an "easy" process.  We were WRONG.   Our growth in 2019 slowed a bit, growing at about 6% for a total client count of 137 at the end of the year.  However, the later part of 2019 was really picking up momentum and both Kerrie Beene and Kate Welker attained their CERTIFIED FINANCIAL PLANNER designation.

Then came 2020.  When I said I planned for what could go "wrong," I left out a pandemic scenario, a major economic correction, one major Act from Congress (but 4 in total, so far), all in the first 5-months of ONE year.  Thank goodness we had the ability to work remotely already, as I can't image trying to figure that out too.   To add "drama" to all this going on, Becky Eason sat for Certified Financial Planner exam in March (which turned out to be the day before they shut down testing) and successfully passed the exam.  It was a bit of a Hallmark ending in my opinion.   We are also thrilled to have added Rachel to the team earlier this year too, and many of you have started to receive meeting reminders from her already.  

Here's the one thing I hope anyone reading this understands, I planned for what could go wrong and I think that is important, but it was a recent podcast guest that got me thinking, what if I had approached this with "What if I Fly" instead.  So in 2020, we want to plan more for "flying" with all of you.  It has been an amazing journey, we are honored to be part of your lives.  Thank you for being the critical part of our success journey and for giving us the wings that will now give us the ability to fly.

SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019

At the very end of 2019 the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 was signed into law.  It gave this weeks blog author and Financial Planner, Amy Irvine, CFP®, EA, MPAS®, CCFC, flashbacks to the 2017 tax law changes that happened at the very end of that year too. There are a lot of little nuggets in this Act, below is our interpretation of the Good, the Bad, and the Weird …

The Good

• If you are turning under the age of 70½ this year, you can now push the required minimum distribution down the road.  The new age is now 72.

• Beginning this year (2020), if you continue to work past the age of 72 (was 70.5), you can now make a contribution to your Traditional IRA.  Prior to this Act, even if you had earned income, you couldn’t contribute once you reached the “magic” age.

• This does not change the Qualified Charitable Distribution age though, that is still 70½ 

• If you receive a stipend or fellowship, that is now considered qualifying income for an IRA (or Roth IRA) Contribution.

• Small businesses will be able to join a pooled employer plan (called a MEP or Multiple Employer Plan), which is meant to reduce the cost to small employers  And if the employer plan has an automatic enrollment feature, they get a small tax credit.

• If you are a volunteer firefighter or EMC, then you will have a one-year repeal of the SALT limit on your federal tax return.  Remember SALT stands for State and Local Tax.

• If you are planning on having a baby, or adopting a child, in 2020 you can now take a $5,000 distribution from your retirement plan WITHOUT penalty.  Of course you have to pay tax on it, but if you redeposit it within 60-days of withdrawing it, then it would not be considered taxable.

• We are thrilled that you can now withdraw up to $10,000 during your lifetime from a 529 plan to repay student loans WITHOUT tax or penalty.

The Bad

• If you turned 70½ in 2019 but elected to defer the RMD until 2020, sorry, but you still have to take it before April 1, 2020.  Also, only those that turn 70½ in 2020 can defer until age 72. If you’re 71, sorry, but you still have to take yours.

• Stretch IRA’s won’t be able to stretch as far in the future.  Historically, your beneficiaries have been able to elect to take the remainder of your IRA over their life expectancy.  That has been nixed in the SECURE Act and the maximum number of years they can defer the account is 10-years. This does not apply to spouses, disabled beneficiaries, chronically ill beneficiaries, certain minor children (until they reach age of majority) and existing inherited accounts.  Based on this, we will be looking at our clients situation to determine if it makes sense to convert taxable retirement accounts to Roth Sources.

• Employers will now be able to add annuity options to their retirement plan programs.  This was fought for very hard by insurance companies and we are very concerned about how this is going to play out. We are not the only ones that feel that way.    Read Rick Kahler’s commentary in an article published on December 30 - “Accessing the Damage Done by the Secure Act.”

The Weird 

We think these are weird considering the Act is called Setting Every Community Up for Retirement Enhancement and the following have absolutely nothing to do with retirement.

• The credit for installing an electric car charger has been restored

• Anyone under the age of 21 will be prohibited from purchasing cigarettes and e-cigarette products (i.e. vaping)

• The medical expense deduction was set to go up to 10%, but the Act has it at 7.5% once again in 2020.

• 529 plans can now be used to pay for Apprenticeships

We will be looking at each of our clients' individual situations to determine how this new Act will fit into their financial lives...so more to come!

Building a Plan to Relax, not React

In this week’s blog, Financial Planner Kate Welker, CFP® shares her “money stress” story and provides some suggestions on how to plan for those unexpected moments so that when they happen, you can take a deep breathe and relax instead of react.

By: Kate Welker, CFP®

Relaxation. The word sounds so happy and peaceful. I recently saw that it was Relaxation Day on August 15th, and the thought of a day set aside for relaxation sounded great. Quiet, a good book, a comfy armchair, sunshine in a hammock, a massage; whatever your variety of relaxation, the thought is sure to bring a smile to your face. I am a huge proponent of taking down time to recharge, but sometimes if you are dealing with stress it can be almost impossible to relax. 

A 2017 report by the American Psychological Association lists money as the number two cause of stress in America. This means more people are stressed over money than they are over work, relationships, or their health. Financial stress can begin to go deeper and lead to problems with your health and relationships. I am sure many of you reading can relate to this - if not currently, you remember a time in the past. You may have experienced that moment when you try to relax and feel the panic rising thinking about the bills to pay or the tasks to be done.

When the problems are facing you it is easy to just try to avoid it. “Try to not think about it or talk about it and it won’t be real.” Obviously this is not a solution and will only make the situation worse, but it’s how we naturally want to work. It’s not fun to look at problems or talk about them so avoidance happens, but the only way to work through them and find some sense of control is to face your problems and make a plan. 

Following are a few suggestions of things you can do to help bring some breathing room and sense of control around your finances:

Face the situation. I mentioned you have to stop hiding from the situation, this means you will look at everything and have it in one place. Write down your bills coming up, the debt you might have to pay, and any long term goals you need to save for. Just seeing this written out and organized in one place should help with staying on track and making a plan going forward.

Missing a payment can be stressful. We all make mistakes and can miss things here or there, but if you find this being a consistent issue establish a system that works or you. Most vendors have online accounts that allow you to set up payments in advance. If it is scheduled you know it will be paid, there just needs to be diligence in leaving the appropriate funds in that account. A method here could be to have a bank account that is only for paying bills. This account gets funded first to cover all the bills to be paid each month and it is not touched for outside spending. Another method is a paper calendar where you write in everything on the due date and refer to that weekly. 

One of the things I think helps ease the anxiety around money is building an emergency fund. It is not always easy to do, but by making it a priority to build up those emergency reserves will eliminate a large amount of “what if” stress. Just knowing the funds are available if the car breaks down or your child flushes a toy down the toilet and your entire sewer lines need to be excavated and replaced (speaking from experience there) should help you worry less. Start with a small goal of $500-$1,000 and build towards a larger goal over time. Make it a priority to contribute to this and if an unexpected lump sum of money comes in like a tax refund use this to continue building that cushion.

Building a financial plan with clients, I will often state that one of my goals is to reduce their stress and worry over their financial picture. Choosing to look at your situation and take control can change your mentality around your finances. Sometimes it’s the little steps that are the hardest to take, but a series of them eventually gets you to your destination. 

FAFSA Planning for Business Owners

Monday Morning Quarter-Buck

By Financial Planner Kate Welker, CFP®

Hornell, New York

Graduation season is upon us! I’ve been filling up my calendar with graduation parties and seeing the social media posts showing the first day of kindergarten next to the last day of senior year. If you have a child entering high school or nearing graduation your mind is likely full of thoughts about their future, college plans, workforce plans, proper high school coursework, the right extracurricular activities, and if college is in their future how to finance it. One of the big steps in the college process is filling out the Free Application for Student Aid (FAFSA) form and working that to your advantage. There are many opportunities for planning around this that a financial planner can help you work through, I’d like to focus on opportunities for small business owners.

Being a small business owner comes with many challenges, but it also allows for some nice flexibility in your business decisions and how they will affect your income in the college planning years. Ideally, you will begin thinking over strategy when your child is starting high school, but even if they are a senior you can make changes now to help in future years. Keep in mind that each school year will base aid off of the tax return from 2 years prior. For example the 2019-2020 school year aid will be based on the 2017 tax return. Moves made in 2019 will affect the FAFSA for the 2021-2022 school year. If your student will be in 11th grade this fall, this tax year is the first that will be looked at when determining financial aid.

As a business owner one of the big numbers you should be looking at each year is the net income on your tax return. This is also the number that will be reported on the FAFSA. Following are some strategies to consider to help make that number lower, or choose to make it higher in certain years.

Business Assets

A major perk of being a small business owner is that you do not need to report the value of your business or farm. There are requirements to be able to meet this exclusion including being family owned and having less than 100 employees. Finaid has a nice summary of the requirements at http://www.finaid.org/fafsa/smallbusiness.phtml.

This includes the overall value of your business and the assets held by the business. The year a new asset, such as a piece of equipment, is placed into service you have the ability to accelerate the depreciation and claim a Section 179 deduction. This will allow you to write off more of the asset and lower your income. This does leave you less to expense the following year and can lead to capital gains down the road when you sell that equipment, but if planned out properly this can work to your advantage with financial aid.

Income Timing

When you are the boss you can choose when to work, you can also determine how and when you are paid. If you are looking at accepting a job that will bring in significant revenue, you will want to take some time to determine if you should accept the job at the moment, or if pushing it back until January would be beneficial.

For example, In December a contractor wins a bid for a job with a large profit margin and the client wants to pay the down payment. If the client is willing to wait until January to start the agreement (if they are a business they may also want their tax deduction so you will need to be aware of that) you can shift that income into the next tax year. You will have that income to deal with the following year, but you have more time to plan on ways to offset that.

High and Low Year Cycles

Another concept to think about is choosing to have a low income year followed by a high income year. If you know that your income levels will make it difficult to consistently keep your income low enough to qualify for aid you can strategize to lump income and deductions in a way that would benefit you in certain years.

Say you had a really good year and know that you will not be qualifying for aid that year. Maximize your income that year; try to bring in funds that are pending, close contracts before the end of the year, and hold off on large purchases. The next year you would focus on maximizing your expenses and achieving a lower income.

That is just a high level look at some complex strategies. There are tax and accounting laws that need to be worked within and tax implications to consider as well.  If you are a business owner and you see ways in your business to make this work I encourage you to reach out to a professional to help you walk through the plan for you.