At AdvisHer, we are all about YOU. We are here to empower you, support you and ultimately, encourage you to own your financial health because you’re WORTH IT! So, all of that makes today’s post a fun one. Today, we have a chance to answer some of YOUR most frequently asked questions. A few weeks ago, we asked you to share what was on your mind – your frustrations, your concerns, your financial questions. We’re excited to be able to answer some of those for you today so you can take another step towards feeling more inspired financially.
Question #1: What’s better to have at a young age: a 401(k) or Roth IRA?
Answer: Great question!! Both, if you can, but if you have to prioritize choose the 401(k). Why? For starters, a 401(k) plan has a much higher contribution limit than a Roth IRA ($19,000 vs. $6,000 annually), so you can certainly set aside the most money towards your financial future with this plan. The second reason you’d potentially want to fund the 401(k) is to take advantage of a possible employer match to your contributions. Most companies do offer their employees some sort of match towards their retirement contributions, so make sure you reach out to your benefits/HR department to understand your options. If it turns out you are eligible to receive an employer match, take advantage of this as much as you can! Essentially, take advantage of the free money on the table by making sure you at least contribute enough towards your retirement to have them match. Finally, contributing to a 401(k) can potentially offer you tax benefits by reducing your taxable income amount. (*Scheduling an appointment with a tax or accounting professional is always a good idea in this case to understand the true tax impact of this type of contribution).
If you can open a Roth IRA, definitely do so. These plans offer a great way to set aside money towards your retirement and – BONUS – you get to withdraw the funds at retirement age tax-free! This can be a huge benefit, especially if you expect your income to grow over time (which would increase your tax liability).
If you’re ultimately hoping to take advantage of each plan, make sure you contribute as much as you can to your 401(k) to receive a potential match by your employer (if applicable), then look to put the remainder into a Roth IRA if that is of interest to you. *Note, to be eligible for a Roth IRA, you must meet the income requirements outlined here.
Question #2: Being self employed, I’m honestly afraid of making too much money and owing huge taxes. How do you grow when you have little business expenses and it’s almost all taxable income?
Answer: Yay for our self-employed lady bosses out there! Kudos to you for following your heart and paving your own path! When it comes to doing taxes as a self-employed individual, it can certainly get complicated quickly. In this instance, you can take advantage of several great free online resources (search “small business” on the IRS.gov site or visit www.TaxAct.com for the self-employed calculator function), or hire an accountant to assist with the overall preparation.
However, when it comes to reducing your overall taxable income, there are some ways you can attempt to do so by establishing and contributing to your own retirement accounts. You may want to look into opening a SEP-IRA or Solo 401(k) plan (both great options) in order to maximize your overall retirement contributions and potential taxable deductions. We’ve outlined some great options to consider here!
Question #3: I struggle with knowing when to pay myself from my biz.
Answer: In short – Pay yourself, sister! Without knowing all the specifics of your business, here’s what we can say: make sure you are turning a profit first and foremost (so that there’s money being made in the first place) and reducing your expenses wherever possible (to make sure that there’s money LEFT OVER at the end of the day). Once you’ve fulfilled all of your business needs/expenses/obligations (including making payments to investors, shareholders, partners, etc.), you can then determine how much money remains for you. If you do a little research online, you’ll be able to gather some intel as to what a fair and reasonable “market rate” might be for your services or time. For instance, if you are a freelance graphic designer, you might consider evaluating what others in the marketplace might be making for similar services. Then, establish yourself as an employee in your company (and set up the required payroll taxes) and pay yourself accordingly. Another thing to consider? Setting up a retirement plan for yourself as well, if possible. See Question #2 for details!
Question #4: How do I save for retirement if my employer doesn’t offer a 401(k)?
Answer: Do your research, then begin investing. While your employer might not offer you a retirement benefit, that doesn’t mean you aren’t able to save and plan for your retirement on your own. The first place to logically start would be by opening up an IRA (Individual Retirement Account) to take advantage of the tax benefits. There are two types: a Traditional and a Roth, which are both outlined here.
After opening up and contributing to either type of IRA, the next step would be to consult with a financial planner and/or advisor to begin strategically setting aside money to invest towards your retirement. Working with a professional in this way can help you make sure you’re staying accountable to your goals, actively contributing to your account, and investing wisely (with your risk tolerance and goals in mind) so that you can make sure “future you” can live the life you’ve always imagined.
Question #5: What to do if you get a great company stock discount but now your portfolio is too heavy on company stock?
Answer: Receiving shares of company stock through an employer-sponsored stock option program is a great benefit! Essentially, how these work is that companies may offer employees the ability to purchase a certain amount of shares in the company’s stock at a set price at a specific date in the future. The reason this is so beneficial? Imagine if you had this ability, and noticed that the current market price of your company’s stock was much higher than the set price you were required to pay. In this instance, you’d be making money instantly due to the ability to purchase these shares at a deep discount. That’s a great perk!
However, keep in mind that while it is certainly a huge benefit to potentially be able to purchase so many company shares at such a discount, it is always smart to diversify the other holdings in your portfolio. As the saying goes, you never want to keep all of your “eggs in one basket”. If you’re only investing in company stock, you’re not allowing yourself to be protected in the case that something unfortunate should happen to your industry or company as a whole. In order to spread this risk around, you’ll want to work with a financial advisor to diversify your investment approach and portfolio holdings so that you’re not completely reliant upon your company stock to perform.
Question #6: HELP! My student loan is so large I don’t know how to manage. What are my options?
Answer: Unfortunately, student loans are a fact of life for most Americans these days. That said, if you’re finding yourself in a difficult financial position because of them, you do have options. We asked Student Loan expert, David Carlson (author of the book Student Loan Solution and the founder of YoungAdultMoney.com) to weigh in on this important question:
“First I want to say you aren’t alone. There are many people with a large amount of student loan debt who are trying to figure out what they should do. Regardless of your income and whether your loans total $5k or $500k, you have options.
How you address your loans will depend on what type of student loans they are. If they are federal student loans you have access to income-driven repayment options and loan forgiveness opportunities. Income-driven repayment options cap your payment at anywhere from 10-20% of your discretionary income, depending on which repayment plan you get on. You can learn more about income-driven repayment plans here or in my book Student Loan Solution, where I go into detail on the ins and outs of each of the four income-driven repayment plans. Besides capping your payments at a reasonable amount, by getting on an income-driven repayment plan you also start down the path of income-driven loan forgiveness. After 20-25 years of on-time payments your loans will be forgiven. You will be taxed on the amount forgiven, though, so if you do plan on taking advantage of income-driven loan forgiveness you will want to understand what you need to do to prepare for the inevitable “tax bomb.” You can also look into whether you are eligible for Public Service Loan Forgiveness, which is a difficult program to navigate but can be a huge financial benefit since your loans are forgiven tax-free after ten years of eligible payments.
If you have private student loans your options are more limited. Unlike federal student loans, you will not have the right to an income-driven repayment plan or opportunities for loan forgiveness. With that in mind, working with your current lender is the first option. You will want to explain to them what you can afford to pay each month and see if they can restructure your loan so your monthly payment is affordable. Another option with private loans is to refinance them with another lender for a lower interest rate. When you do this you can also apply for loan terms that will make your monthly required payment reasonable (for example you may extend your loan to a fifteen year term instead of ten). Finally if you are really drowning and unable to work out a reasonable plan with your lender you can always talk to a debt lawyer who can negotiate on your behalf.”
*Special thanks to David Carlson for providing such an insightful and informative response to this great question!
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