As life emerges from the pandemic to a “new normal,” a mid-year financial checkup may be more important than ever this year. Here are some ways to make sure that your financial situation is continuing on the right path.
Reassess your financial goals
At the beginning of the year, you may have set financial goals geared toward improving your financial situation. Perhaps you wanted to save more, spend less, or reduce your debt. How much progress have you made? If your income, expenses, and life circumstances have changed, you may need to rethink your priorities. Review your financial statements and account balances to determine whether you need to make any changes to keep your financial plan on track.
If you are a BFSG client, please remember to contact your financial advisor if there are any changes in your personal or financial situation for the purpose of reviewing our previous recommendations.
Take a look at your taxes
Completing a mid-year estimate of your tax liability may reveal new tax planning opportunities. You can use last year’s tax return as a basis, then factor in any anticipated adjustments to your income and deductions for this year. Check your withholding, especially if you owed taxes or received a large refund. Doing that now, rather than waiting until the end of the year, may help you avoid owing a big tax bill next year or overpaying taxes and giving Uncle Sam an interest-free loan. You can check your withholding by using the IRS Tax Withholding Estimator or by talking with your tax advisor. If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.
Tax planning typically is backwards looking at just the past year. We recommend you take a proactive forward-looking approach by coordinating with your tax professionals to find ways to reduce your taxes now and in future years.
Check your retirement savings
If you’re still working, look for ways to increase retirement plan contributions. For example, if you receive a pay increase this year, you could contribute a higher percentage of your salary to your employer-sponsored retirement plan, such as a 401(k), 403(b), or 457(b) plan. For 2021, the contribution limit is $19,500, or $26,000 if you’re age 50 or older. If you are close to retirement or already retired, take another look at your retirement income needs and whether your current investment and distribution strategy will provide the income you will need. Check out BFSG’s recent webinar on Retirement Accounts (Traditional vs. Roth) and learn ways to maximize your retirement savings.
Evaluate your insurance coverage
What are the deductibles and coverage limits of your homeowners/renters insurance policies? How much disability or life insurance coverage do you have? Your insurance needs can change over time. As a result, you’ll want to make sure your coverage has kept pace with your income and family/personal circumstances. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.
Finally, you should also ask yourself the following questions as part of your mid-year financial checkup:
As always, our team of CERTIFIED FINANCIAL PLANNERS™ stands ready to assist: firstname.lastname@example.org.
Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.
One of the most common questions people ask is why they need (or what is the best) to use an LLC or umbrella coverage if they own rentals. If you are sued, you will want to have some form of protection to make sure your other assets like your primary residence and retirement accounts are safe. This is an important part of planning when you have rental property but unfortunately is often overlooked. Let’s review using an LLC or umbrella policy and discuss the merits of both.
Basics of Umbrella Policy
As the name implies umbrella insurance is a sort of catch-all that provides additional protection for the “What If’s” that works to protect you when you reach the limits of other insurance policies like homeowners or auto. Imagine you are sued for $1 million for a car accident you caused, and your auto insurance coverage only goes up to $500,000. If you are found at fault you would be on the hook for $500,000 without umbrella coverage but if you have umbrella coverage it would cover the remaining amount up to policy limits. Take a look at the example below:
The great thing is that with an umbrella policy you are protected whether something happens to you personally (i.e. auto accident) as well if something happens at your rental properties. Umbrella insurance provides great benefits for a relatively low cost. The downside is that if the claim exceeds your umbrella policy you are on the hook for the excess amount.
Basics of an LLC
A Limited Liability Company (LLC) is designed to provide asset protection by separating your personal property from your rentals. By establishing an LLC, if you get sued, they are suing the LLC and thus you are protecting your personal assets from the lawsuit and only the assets in the LLC are at risk.
If you have multiple properties it becomes expensive and difficult to qualify for the proper insurance amount. If there are multiple properties it is common to establish an LLC for each property for further protection. If you have a property in multiple states, you will need to establish an LLC in each state you have a rental. The disadvantage to LLCs is that the paperwork can be a pain and they can be expensive. For example, in California, it costs $800 a year for each LLC you have. This can be very expensive if you have multiple rental properties. Another drawback is getting a mortgage for a property in an LLC is more difficult and typically has higher interest rates.
What is best for me?
It will depend on your rental property strategy, your cash-flow, the risks you are willing to take, and your situation. Neither strategy is full proof, and both have important strengths and weaknesses. Please understand your state rules also impact which strategy is best for you. Please contact us or your attorney to discuss your situation in greater detail.