Thursday, October 21, 2021

Credit Scores Reach Record High

 The average FICO® credit score in the United States reached a record high of 711 in 2020, despite the financial challenges of the pandemic. In fact — contrary to what might be expected — consumer debt management improved after January 2020, with shrinking debt, decreased use of credit, and a drop in late payments.1

This may reflect more cautious spending by consumers in the face of a struggling economy, as well as support from government stimulus. Even so, credit scores have been steadily increasing for the last decade.2

An Important Number

Your credit score can influence loan approvals and terms for a variety of financial transactions, not only for major purchases such as a home or car but also for credit cards, insurance premiums, and home rentals. It may even affect a job application.

Thursday, October 7, 2021

Fund Retirement and Reward Workers with a Cash Balance Plan

Cash balance plans are defined benefit plans that share some key characteristics with 401(k) plans, which makes them flexible and appealing to a growing cadre of small employers. In fact, there was a 17% increase in new cash balance plans between 2017 and 2018.1

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The Tax Cuts and Jobs Act helped boost the popularity of cash balance plans, because making deductible contributions can help partners in professional service firms and other business owners reduce their income below certain thresholds to qualify for an additional 20% tax cut.

These hybrid plans have generous contribution limits that increase with age. In 2021, a 65-year-old could save as much as $276,000 in a cash balance plan, while a 55-year-old could save $207,000 on a tax-deferred basis (until the account reaches a maximum accumulation of $2.5 million).2 They can also be stacked on top of a 401(k), which has a maximum contribution of $26,000 in 2021, or $64,500 with a profit-sharing plan.

Having the ability to make larger contributions may allow business owners to reduce their tax burdens, build retirement savings, and reward valuable employees — all at the same time.

Grandparent 529 Plans Get a Boost Under New FAFSA Rules

529 plans are a favored way to save for college due to the tax benefits and other advantages they offer when funds are used to pay a beneficiary’s qualified college expenses. Up until now, the FAFSA (Free Application for Federal Student Aid) treated grandparent-owned 529 plans more harshly than parent-owned 529 plans. This will change thanks to the FAFSA Simplification Act that was enacted in December 2020. The new law streamlines the FAFSA and makes changes to the formula that’s used to calculate financial aid eligibility.



Current FAFSA Rules

Under current rules, parent-owned 529 plans are listed on the FAFSA as a parent asset. Parent assets are counted at a rate of 5.64%, which means that 5.64% of the value of the 529 account is deemed available to pay for college. Later, when distributions are made to pay college expenses, the funds aren’t counted at all; the FAFSA ignores distributions from a parent-owned 529 plan.

By contrast, grandparent-owned 529 plans do not need to be listed as an asset on the FAFSA. This sounds like a benefit. However, the catch is that any withdrawals from a grandparent-owned 529 plan are counted as untaxed student income in the following year and assessed at 50%. This can have a negative impact on federal financial aid eligibility.