Holiday Tip and Gift Guidelines

As we recover from Thanksgiving, we turn to Black Friday and then Cyber Monday, so the holiday season is in full swing.

christmas-tree-1812689_1280

Part of your gift giving may be tipping those around you upon whom you depend. While gift giving etiquette may be obvious in some instances, it can get less clear when considering gifts for people outside of your friends and family. So, to help you navigate the season, we have put together a guide of suggested amounts for gifts and tips, as well as final comment on notes and cards in lieu of cash.

We all have people in our lives that help us keep our families, homes and businesses on track and get through each day as we move forward throughout the year. In many cases, the services they provide ensure we can go to work, have clean homes and stay fit, including caregivers, delivery, home maintenance, and personal care services:

Caregivers (for kids, parents and pets, too!)

Caregivers for your children, parents and pets can be lifesavers. They provide care, education, exercise, and attention to those you care about most. This is the time of year to let them know how thankful you are for all that they do. The amount of service they provide and the arrangement you have with them can dictate the appropriate gift level:

  1. Nanny/au pair – a week’s salary and a small gift;
  2. Daycare teachers – a $25-$70 gift;
  3. Home healthcare worker – a week to a month’s salary;
  4. Teacher – a small gift and a handmade card from your child;
  5. Dog walker – depending on your walker’s schedule, you may want to gift a day’s pay or a full week’s pay; and
  6. Dog groomer – half the cost to the full amount for the service.

If you contract any of these services through an agency, you may want to contact the agency to find out if they have a gift-giving policy in effect. If the agency prohibits gifts, consider alternatives like making a donation to the agency or sending in homemade cookies to the office.

“Neither snow nor rain…”

Despite the weather, terrain or traffic, your mail carrier delivers your mail every day and your online purchases arrive on time and in good condition. Let those who make those deliveries know you’re grateful. In deciding what and how much to give, consider the particular company’s gift giving restrictions:

  1. Mail carriers – are not prohibited from receiving cash gifts and gifts more than $20;
  2. FedEx – employees may accept gifts under $75, though no cash or gift cards;
  3. UPS – workers are allowed to accept tips, but UPS discourages the practice; and
  4. Newspaper delivery – $10-$30 is standard.

Home Maintenance:

Whether you live in a single-family home or a large apartment building, it’s likely there is someone who services your home or property in some way.

  1. Trash and recycling collectors – $10-$30, which you may want to mail directly to the collection company if you’re not home to hand deliver it;
  2. Doorman – $25-$100;
  3. Regular cleaning person – the cost of one visit;
  4. Landscapers/gardeners – $20-$50 per person or if you have just one person doing the work, the cost of one visit;
  5. Parking garage attendant – $10-$50; and
  6. Building’s handyman, superintendent and custodian – $20-$100.

If you have someone who always goes the extra mile, such as a handyman who’s prompt and efficient or a doorman who is quick to carry heavy packages for you, then a larger tip may be warranted.

Personal Services:

It’s hard work keeping you fit, perfectly coiffed and beautiful, but recognizing the efforts of those who do is easy and may also buy you scheduling flexibility when you really need it. In deciding whether to tip and how much, consider this:

  1. Hairdresser/manicurist – if you’re a frequent visitor, tip the cost of one visit. If you’re a less frequent customer, then $20. However, if you tip generously through the year, you do not need to give an extra tip at the end of the year;
  2. Personal trainer – up to the cost of one cost;
  3. Massage therapist – also cost of one visit; and
  4. Golf or Tennis instructor – a thoughtful gift.

If you’re unable to tip or give a gift, a thoughtful thank you note will acknowledge the good work these people do for you throughout the year. Another effective gesture of gratitude is to send a thank you note to the supervisors of the people who provide you with great service throughout the year, letting them know how impressed you are with the service you receive. Good feedback is appreciated by both the supervisor and the people who are helping you out.
christmas-1678707_1920

What is the AMT?

 Not, it is not a dyslexic version of ATM!

 Back when people could shelter almost 100% of their high income, Congress decided to make that more difficult by creating the alternative minimum tax (“AMT”), a minimum tax that all must pay with a rate of 28%. This along with sweeping changes made in 1986 made it difficult for the top taxpayers, people with income over $1 million, to get much below an average tax of 20%.

On the other hand, an AMT rate as high as 28% is still great if your marginal rate is 39%.

Why do you care? Despite the title, you do not get to pick

You must pay the higher amount determined by the regular and AMT tax calculations. If you have to pay the AMT, you are paying almost a flat rate of 26% to 28%, not a graduate rate, and you are losing the value of many itemized deductions, including state income taxes paid, most mortgage interest and miscellaneous deductions. To make sure you pay taxes, certain “preference” amounts are added to your AMT income, including incentive stock options and alternate depreciation schedules.

Data on 2012 income tax indicates that nearly every married taxpayer with income between $100,000 and $500,000 owed some AMT. Thus, the AMT is no longer just for the ultra rich!

So what do you do? Plan carefully

Make sure that efforts to reduce regular taxes do not push you into paying the AMT. Here is one example: If you have a year with high ordinary income, be sure to pay all of the state income taxes due during that calendar year, since you are less likely to be in the AMT doing so but are like to be in the AMT next year if you wait until April to pay those state taxes. The lower ordinary income of next means that you will certainly be in the AMT.

Note: some states also impose an AMT, making planning quite … er, taxing!

clutter-193489_1920

Oh, that looks complicated!

Good planning pays off, as in the example above, where preserving the deduction can be a very substantial savings on your federal income taxes.

Okay then, what is a financial plan?

You may hear some argue that robo-planners will not replace individual, human planners. I call them the “There’s no app for that” group.

We do believe that “There is an app for that.”
workshop-1280264_1920

Well, that is not what I had in mind.

But exactly what is “a financial plan”? Finding a good, workable definition is a challenge.

Wikipedia says:

Textbooks used in colleges offering financial planning-related courses also generally do not define the term “financial plan.” For example, Sid Mittra, Anandi P. Sahu, and Robert A Crane, authors of Practicing Financial Planning for Professionals[8] do not define what a financial plan is, but merely defer to the Certified Financial Planner Board of Standards’ definition of ‘financial planning’.

Can’t we define “financial plan”?

Yes. Investopedia offers this broad definition:

While there is no specific template for a financial plan, most licensed professionals will include knowledge and considerations of the client’s future life goals, future wealth transfer plans and future expense levels. Extrapolated asset values will determine whether the client has sufficient funds to meet future needs.

And Wikipedia gives more detail:

In general usage, a financial plan is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. This often includes a budget which organizes an individual’s finances and sometimes includes a series of steps or specific goals for spending and saving in the future.

So you need to project where your assets can take you to be sure you meet your future in good shape. Makes sense

And what is my definition?

A to do list or “action plan” that tells you what you need to change now so you optimize the use of all your resources to achieve your major, long term goals in the future.         

So what does a financial plan look like?

If you paid to have a financial plan prepared, and have a complicated situation, you may get a glossy, bound book filled with projections, charts and graphs, plus text. While much of it may be boilerplate, it will tell you where you are going from now until you die, how your money will follow if you invest according to the plan, and what you need to change on taxes, insurance, and your estate plan.

At the other extreme, you can glean the essential steps and write them all on a PostIt note, which you then place in a spot you see often enough to remind you what to do:

  • Maximize my 401(k) contributions,
  • Set up and contribute to a Roth IRA,
  • Review my investment allocation, use ETFs,
  • Steer clear of any major credit card debt,
  • Review my beneficiary designations,
  • Sign an medical directive, and
  • Save enough for a fun (not too expensive) vacation next summer!

In the end, it doesn’t matter how many pages or what the plan looks like; what matters is that you learn from reviewing your finances and change how you manage your resources so that improve your finances.

So, yes, a simple to do list could be enough, if you follow it!

Roth or not to Roth? Deciding requires predicting your future tax rate

376020383

More employers now provide the option of a Roth 401(k) as well as a traditional 401(k), so you may ask:

Which should contribute to a Roth 401(k) or a traditional 401(k)?

The answer is not so simple and it depends on your income tax rate now and at retirement. Before offering background and explanation, we start with this Quick Summary

If you have a high tax rate now, and expect a low tax rate later, pick the traditional 401(k)

The traditional plan is better because get the current tax deduction, reducing taxes now at the higher tax rate. This may be true for people in middle or later years of employment.

Note: this is only financially better if you invest the amount of taxes saved.

If you have a low tax rate now, and expect a high tax rate later, pick the Roth 401(k).

The Roth plan is better because you avoid higher taxes later. This may be true for most people starting work now.

If expect to have the tax rate later as you have now, pick the Roth 401(k)

The Roth plan has other benefits described below.

Background – How the Plans Work:

Tax deferred growth

Earnings on both the traditional 401(k) and the Roth 401(k) are not taxed. Not paying taxes on investments in your retirement account means more grows and compounds tax-free – that is why contributing to a retirement plan is so important.

Contributions “pre-tax” vs. after tax

Contributions to a traditional 401(k) are made “pre-tax,” meaning that the amount contributed is excluded from your taxable income for the year.

Contributions to a Roth 401(k) are made after tax – they are not excluded from taxable income.

Taxing withdrawals vs. no tax

Withdrawals from a traditional 401(k) are taxed in the year of withdrawal.

Withdrawals from the Roth plans are not taxed. That is, the after-tax contributions are not taxed a second time and neither is the growth on those contributions.

Other rules – early withdrawal and require minimum distribution

There are penalties for withdrawal before reaching age 59½, unless certain exceptions are met, such as disability or first-time home buyer.

You must begin withdrawing when you reach age 70½ under the IRS Required Minimum Distribution or “RMD” rules. For more on RMD rules, see IRS Retirement Topics – RMDs

Hedging your bets:

If you are not sure of your tax rates, or if you just want more options because you cannot predict, then you can opt to combine plans. For example, you can contribute to your traditional 401(k) up to the employer match and then put the rest in a Roth IRA, if the contribution limits allow.

Conversions:

When you change jobs, you can convert a 401(k) to a Roth IRA, but doing so is a taxable event. If you expect your tax rate to be higher in the future, this is a good move. However, you will want to pay taxes due from other sources. If you have to take funds from the IRA to pay the taxes, you reduce the amount going into the Roth IRA which dramatically reduces the future benefit.

If you convert after-tax contributions made to a traditional 401(k) or non-deductible IRA, you have less on which taxes are due because the after-tax portion is not taxed in converting to a Roth IRA.

Other considerations:

While a Roth 401(k) is subject to RMD, a Roth IRA is not. If you can re-characterize the Roth 401(k) to a Roth IRA, you avoid the RMD. This may mean that you pass more on to your heirs. Also, you may gain investment flexibility compared to a company plan.

If you use a Roth plan, then your taxable income at retirement will be less than if you were withdrawing from a traditional plan where withdrawals are taxed. This could lessen tax due on social security benefits.

On the other hand, if you expect to use funds in your retirement plan to donate to a charity, you are better off getting the tax savings for yourself now. The charity is not subject to much if any income tax.

Also, if you expect your heirs to receive your retirement plan assets and know that those heirs will be in a lower income tax bracket, you should use a traditional plan now to get the tax benefit for yourself. How can you possibly determine that heirs will get more of your retirement than you and also be in a lower tax bracket? I cannot imagine – well, maybe I can, but none of the ideas sound good. Anyway, it seemed like a good idea to mention (they teach you to think this way in law school).

Should we use Robo-Advisors? I don’t know, let’s ask Siri!

robot-507811_640

Any web search for “robo-advisors” (or robo-advisers, robo-planners, etc.) produces an interesting spectrum of content, from “for” to “against,” with a fair share of “undecided.”

Some posts are ready to embrace new technology. See Robo Advice? Bring it on, it will be great for business by Tony Vidler. He says robo-advisors:

will be good for business for those advisers who provide real value and are smart marketers. The Robo’s will probably kill off the bottom-feeders in the business, together with those who have no genuine advice-based value proposition. Perhaps that is an unfortunate consequence, but then, maybe it isn’t.

We also like Neil Wood’s post “Are You Prepared For the Tidal Wave Of Assets Going Into Robo-Advisor Programs?” He says:

Remember the stock jockeys of the 1970s-1990s that refused to embrace financial planning? Many call them dinosaurs that died with a change in the way our industry did business. There will always be new competitors in our industry. People want faster, cheaper, better, improved, more powerful and a so-called better mousetrap.

But many posts are threatened by new technology. For example, the title alone in the post by Sara Grillo puts robo-advisors in a derogated status: Why a Robo-advisor is Like Getting Financial Advice at a McDonald’s Drive Through. More on Ms. Grillo in a minute ….

Here is another, where the title of the article by Craig Iskowitz sounds as if he thinks robo-advisors are a passing fad: Dead Robo Walking: Why Wealthfront is Doomed. However, he provides real analysis of the new technology and differentiates the growing field of robo-advisors, calling out Wealthfront as an advisor he believes failed to prepare and execute well. Wealthfront may not do well, but Mr. Iskowitz sees it as losing out to other investment firms, both robo or traditional. (Also see Robo-Advisors may be just what we need!)

Finally, there are some who purport to be threatened but may in fact be carving out their own turf in the robo-advisor space. Ron Lieber believes that is what JP Morgan is doing. See “Jamie Dimon Wants to Protect You From Innovative Start-Ups.

As I said in What is a financial plan?, that those who insist that robo-advisors will not replace individual, human planners comprise the “There’s no app for that” group.

Hold on, Steven. This is Siri. What about me? Where do I fit in?

Well Siri, you are a robo-voice, not an advisor.

But you ask me questions all the time!

Yes, I do. But I don’t count on you for life-changing decisions!

I’m hurt!

Enough! As promised, back to Sara Grillo. In the end, she thinks robo-advisors “are a good way to get financial advice for those who have no emotion attached to their money, a long time horizon, and simple requirements.” However, if you need more attention, then she expects you to pay a human for advice, despite the $500,000 portfolio minimum threshold barrier.

Should that be the cutoff? You have to already be wealthy to get good advice? We think it shouldn’t.

Imagine that, as a financial planner, CFP or other advisor, robo-advisor technology frees up more of your time. You could use that time to provide more advice to clients or to advise more clients. Just like the introduction of word processing and desktop computers in offices decades ago, technology brought efficiencies and created a massive shift in how we use time.

Or Imagine that we can create a robo-advisor website that will provide the sort of advice that a human would, even encompassing the issues Ms. Grillo suggests: “complicated trust and estate issues, a need for cash flow planning.” This is my hope for the website we are building, that we can make the essence of human financial planner advice accessible to those who made need it most, who have not amassed great wealth – yet.

Technological change comes in many forms and constantly evolves – that is a constant in our lives. Those who resist are often buried in the process – Neil’s dinosaurs. Those who would adopt and adapt fare far better.

Don’t you agree Siri? Siri?

I’m not talking to you until you apologize

Oh boy.