Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research, Inc., a Broker/Dealer Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., A Registered Investment Advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus, brought to you each and every Wednesday morning right here on KROS. Well this is Nate Kreinbrink joined once again by Andy Fergurson with NelsonCorp Tax Solutions. Two weeks in a row Andy. You’re going to get used to that seat sitting over there.
Andy Fergurson:
It’s a new record.
Nate Kreinbrink:
It’s a new record. Last show of August. I know we were talking most of the area schools are back to classes, whether that’s in classroom, virtually, a hybrid theory or whatever. They’re going with some of that, but most of them are back in classes, so that’s good to see. And of course we’ve got really hot temperatures.
Andy Fergurson:
Yeah and I think for back to school I’ll probably figure out the schedule right about Christmas time. I got so many stinking kids. They’re in every grade and every day and it’s…
Nate Kreinbrink:
Alternating ones and who’s here, who’s there and…
Andy Fergurson:
It’ll be a miracle if I figure out where they’re supposed to be on what day at what time.
Nate Kreinbrink:
It’s getting that they’re making that effort to get back and just wish the continued health and safety to all the teachers, students, faculty, staff, everybody that goes along with it, as we manage through these times that we’re in right now.
Nate Kreinbrink:
So I know Andy coming back again for week two. I know the last couple of times that Andy’s been on we’ve kind of talked big picture tax planning, Roth conversions, just things to look at when you’re done filing your taxes, but to look at for next year contributions, anything like that.
Nate Kreinbrink:
I know we had talked yesterday when Andy and I were sitting in my office going over what we were going to talk about for this morning. And he came up with this one phrase that I thought really stuck and it was tax landmines. And I think that really hits home with some of these just immediate things that people do that again, if not done correctly, and if not understanding what it is that they’re doing, can really blow up and really have a detrimental effect to them. One of those, I think that you had said the other day was just understanding the difference between a 401(k) loan and a 401(k) distribution and how your employment status changes and changes the status of each one of those.
Andy Fergurson:
Yeah, absolutely. So that’s one of the things that we’ve seen a lot lately is, people take the opportunity sometimes for whatever reason to borrow money against their 401(k). Usually it’s a relatively easy process to get that money out. Then there’s a repayment process that happens through your employer as to how you put the money back in. What people don’t realize is that if for some reason they separate from their employer, they get a better job, their employer has layoffs, which I’m sure all those things are happening this year to people. Anybody who’s got one of those outstanding loans against their 401(k), when they make that separation from their employer, they have to either completely reconcile that loan. They have to pay it back in full or it becomes a distribution. Because when they separate from their employer that turns it into a distribution and that causes tax. And in other years, not in 2020, but in any other year, that would also cause a 10% penalty.
Nate Kreinbrink:
For those that are below 59 and a half or whatever, for that 10% penalty on top of that. I think that’s important for people to realize, because again, you take that not knowing. You think you’re just going to pay you back or whatever. But then again, given what we went through in the past couple of months, situation changes, new job arises. That really can be detrimental, not only to that year, but again for when you file those tax returns to impact any other things as well.
Andy Fergurson:
Yeah, and we’ve seen it hit people in significant ways to reducing the amount of other deductions and credits that they can take on their tax return. This past year we saw it cost people the stimulus because that distribution counts as income. And so it through their income up above the level where they were no longer going to get the stimulus. And so there’s just all kinds of things that are unforeseen when that turns into a distribution. So it goes back to what I’m sure you tell people all the time. I know I’ve said it probably to every client who’s ever sat in front of me is just don’t take money out of your 401(k). I mean, if there’s any other money available to you, it’s cheaper to get it somewhere else.
Nate Kreinbrink:
Right.
Andy Fergurson:
I mean, even if you’re taking it from the banker, it’s definitely cheaper from the bank. Sometimes it’s cheaper to put it on a credit card than it is to try and take that money out of your 401(k). Because when it turns into that distribution, it’s really expensive money. They really hit you with tax, and like I said, in most years a penalty. Now this year, there’s no penalty.
Nate Kreinbrink:
You’re not even talking about the compounding effect that you just lose because now you’ve got a much smaller amount that’s invested for a longer period of time. So trying to build that back up, just to get back to where you were, to be able to know that you have enough to save for retirement. Again, you’re taking a step forward, but you’re taking two steps back then every time to try and dig yourself out of that hole.
Andy Fergurson:
And a lot of companies won’t match a 401(k) contribution until you get back to that vested amount. And so there’s all kinds of things wrapped up in that decision. And so it’s just got to be really, really an emergency. And there, it has to be a last option for people to make it reasonable.
Nate Kreinbrink:
One other thing that you had mentioned as well, Andy, was health insurance with Obamacare.
Andy Fergurson:
Oh yeah.
Nate Kreinbrink:
When you’re anticipating what you’re going to make for the year, you get closer to the end of the year and the number that you had thought and what you had anticipated is different. And that does have an impact on you, especially when you make more and sometimes a lot more than what you had thought you were going to make. How does that impact individuals?
Andy Fergurson:
Yeah. So the Obamacare, it’s called the premium tax credit. The premium tax credit is an interesting tax phenomenon because it’s not like most other tax benefits in that it’s not a graduated phase out. It doesn’t happen. Most tax credits, if you make more than you should or your income’s above a certain level, it begins to phase out the credit. So, if you go a thousand dollars over, you lose $5 worth of credit or something like that. Whereas the Obamacare or the premium tax credit, that’s more of a cliff. And if your income crosses a certain point by even $1 that can cause you to have to pay back the entire premium tax credit that you got when you signed up for it.
Andy Fergurson:
So what we’ve seen is we’ve seen clients that have projected their income. Because when you sign up for the premium tax credit, you say, “I expect to make this much money.” We’ve seen clients that project their income, and then because of things that they weren’t expecting… Maybe it’s money that lands in their account from an inheritance. Maybe it’s their stock portfolio does better so they have some capital gains or some dividends that they weren’t expecting. Well, we’ve seen that inch their income up over that threshold. And it can be devastating when it happens. I know we had an experience where I saw a client who it swung their tax return $15,000 by going $400 over that limit because it requires once you cross that threshold that you pay back all that premium tax credit that you got. And there’s things that can be done if you see that coming early enough and you get to your tax preparer. There’s things that they can do to help you reduce the number that they’re using to calculate whether or not you’re over the cliff, but you really got to pay attention to that.
Andy Fergurson:
I’ve seen people that are in Social Security and they pull money from their IRA to make ends meet because they’re on Social Security. Well, if they pull too much money from their IRA, they cross that threshold. Now they’ve got to take more money out of their IRA because they got to pay 15,000 or $12,000 back to the government for the premium tax credit. And so it’s important to know where that number is, where that level is, and where you are in regard to it. If you are on Obamacare or if you receive the premium tax credit you got to know where that number is. Because a lot of the times what I’ve seen is the money that puts you over the top is usually something extra, right? Somebody buys a car in November and they’re like, “Well, I’m just going to pay for it out of my 401(k).” Well, they take that money out, it increases their income and boom. Now that car just got $10,000 more expensive.
Nate Kreinbrink:
And again, I think you going over just these two little things, going over the real life situations that what a negative impact it does have on you and the large impact that it could have on you in a negative way. And these are just some of the things that we went into. And I think a lot of times people just think of their taxes as I turn them in March-ish and get them done and I’m done. And I don’t have to think about them again for another 12 months or 11 months or whatever. But that’s definitely not the case.
Andy Fergurson:
Yeah. If you spend all your time at tax time responding to what happened to you during the year, then you’re left paying whatever’s due. But if you look at taxes as an opportunity to plan, things can be much different for you. So you can either be reactionary or you can be proactive in your taxes.
Nate Kreinbrink:
We say tax preparation versus tax planning.
Andy Fergurson:
Exactly.
Nate Kreinbrink:
Looking backwards versus looking ahead and what you can do to better your situation if you paid too much the previous year.
Nate Kreinbrink:
Andy, we go so quickly when we start getting on a roll with some of these topics. We are out of time, but did want to mention every Friday NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of August will be donated to the food pantry at the Associate Benevolent Society in Clinton.
Nate Kreinbrink:
Once again, Andy, I appreciate you joining me again this week. Again, Nate Kreinbrink, NelsonCorp Wealth Management, Andy Fergurson, NelsonCorp Tax Solutions, bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research, Inc., a Broker/Dealer Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., A Registered Investment Advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice for more information visit our website at www.NelsonCorp.com.