How to Manage Restitution Payments

As much of a relief as it is to step outside the prison gates, newly-released offenders face a variety of challenges as they reacclimate to the outside world — including financial hurdles like restitution.

In this post, we’ll guide you through the basics of restitution, including how payments are made and whether or not you can go to jail as a consequence of failing to make them.

What is a restitution payment?

Restitution is a type of loss compensation a criminal must remit to the victim of their crime.

In most cases, restitution is a sum of money, but it can also be paid by performing services as ordered by the court.

Specifics regarding how restitution payments are calculated, how often you’ll make them, and who you have to pay them to all vary based on your jurisdiction, as well as your specific case details. For instance, some restitution arrangements are even made before a criminal charge is pursued as part of a bargain for less jail time; sometimes, restitution is part of probation and taken care of through the probation department.

While the specific calculation of your restitution payments generally lies in the hands of the probation office, it’s based on your ability to pay and may be expressed as a percentage of your income. Your restitution payments should not be so high as to be out of your ability to afford them given careful budgeting.

Restitution payments cover actual damages to physical property or remuneration to the victim, so they do not include any repayment required for pain and suffering.

How do you know if you need to make a restitution payment?

In the majority of cases, restitution is ordered as part of the sentencing of a trial.

A judge will tell you whether or not you owe money to the victims.

How do you make restitution payments?

If you’re ordered to make restitution payments, the specifics around who and how you’ll remit those payments will, again, vary based on your specific case and jurisdiction.

A common scenario in criminal cases, wherein restitution is rolled into probation, involves making restitution payments directly to your parole officer, who then cuts a check to the victim. Your probation office may also have you set up to remit payments through an online system, like JPay. The specific terms of your restitution payment agreement should be made clear to you during the sentencing period, and if you have any questions, you should contact your defense attorney.

While wage garnishment laws vary by state, generally, your wages can’t be garnished for restitution payments…unless the victim institutes a civil action in an attempt to collect payment. In that case, collections attempts may include wage garnishment, as well as potentially putting liens against your property or bank account.

What happens if you don’t pay?

Many ex-offenders want to know — with good reason — if they can go back to jail for failing to repay restitution. But the answer depends on whether or not your restitution arrangement is rolled into a conditional release program, like probation.

If your restitution payments are part of your probation agreement and you fail to make them, you are violating your probation and can be sent back to jail.

If, however, you simply can’t afford to pay your restitution as agreed, it is sometimes possible to arrange an indigency hearing before the judge. Your attorney can help you make your case, which may result in lower payment amounts or a more lenient repayment schedule.

If restitution payments are demanded as part of a judgment order, and not tied to conditional release, the answer is less straightforward.

While you generally can’t be sent to jail as a direct result of your failure to pay, you may be held in contempt of court, and incarceration can be ordered as part of contempt cases.

How to manage your payments

As much of a relief as it may be to finally be free, ex-offenders face a litany of expenses upon relief — which can make managing your finances a pretty serious challenge. Restitution payments have to be worked into a larger budget, which must also account for costs like probation supervision, child support and existing debts, as well as regular living expenses.

While we’ve tackled these issues in a more in-depth guide to expenses for ex-offenders, here are some basic tips to help you reintegrate and find ways to manage your restitution payments as part of a holistic budget.

Finding employment:

Although discrimination still runs rampant, movements like the Ban the Box campaign are making moves in the right direction for ex-offenders searching for gainful employment. Online resources like the job board at HelpForFelons.com can also guide you toward positions and companies that are open to those with criminal backgrounds. Finally, don’t dismiss the power of your network: contacts you make in social settings like recovery programs or in-jail job training can help you find the leads you need to connect you to available positions.

Budgeting:

Once you have a steady stream of income, you still need to make a plan to ensure the money goes where it needs to — including toward your restitution payments. It’s important to make a comprehensive budget with every expense you’ll face on the outside, including basics like housing, food, clothing and transportation, as well as jail-adjacent costs like probation supervision fees.

If restitution in particular is part of your conditional release agreement, making payments as agreed should be a budgetary priority.

Failure to meet your probation agreements could mean an extension of your probation — or even cause the court to revoke your probation altogether and serve out the rest of your time in jail. Even if you aren’t on probation, failure to make restitution payments could lead to serious consequences, not to mention wreak havoc on your credit history, which may already be in need of credit repair.

The bottom line

Because restitution terms vary by jurisdiction, it’s always important to contact your defense attorney or reference state statutes directly if you have any outstanding questions concerning restitution. And while they may add a financial burden on the newly-released, making them as agreed is an important way to ensure your continued freedom.

4 Expert Budgeting Tips That Will Help You Save More Money

Yeah, I know: Keeping a budget is important for good financial health. But in terms of creating and sticking to one, what are the pointers I need to keep in mind? How often do I reassess? What should I focus on the most? Should it fluctuate? What budgeting tips are most important? – Shaun, via email

Most of us realize that a budget is the cornerstone of financial well-being. A Bankrate survey from last year found that about two-thirds of Americans have one, which should be good news indeed.

And yet we’re evidently not using them very well. Only 40 percent of adults have enough savings to handle an unexpected expense of $1,000 or more, according to Bankrate. As for retirement planning? We’re no better. Investment giant Vanguard just put out a report showing that its median retirement account balance — where half the population is below and half is above — is a measly $22,217.

So you’ve hit on an important question: How do we create budgets that actually help us achieve our major financial goals? Your email was a good excuse to connect with someone who knows a little about the subject: Frankie Corrado, a Holmdel, New Jersey–based financial advisor who also serves as president of the Alliance of Comprehensive Planners.

As their name implies, the ACP’s mission is to address finances holistically, and there’s arguably nothing more important to it than a solid budget. Here are a few of Corrado’s pointers on the topic.

Fatherly IQ

4 Budget Tips Everyone Needs to Know

  1. Pay Your Future Self First
    Mentally, a lot of folks spend their paycheck before it even hits their bank account. There’s the four-burner grill for the back deck, the new video game that just hit the shelves, or the long-awaited night out with the guys.
    That stuff is fine — if you have money left over. Corrado recommends diverting an appropriate percentage of your income to your retirement and savings accounts first. If you start young, socking away 10 percent of your salary toward a 401(k) should put you in good stead. But if you can, reaching the 15 or even 20 percent mark will give you a little breathing room.
    Will building a nest egg give you the same thrill as a trip to Gamestop? No, but your future self will thank you when you get to retire before hitting a 75th birthday.
    As long as you take care of those long-term needs first, you’re giving yourself some financial freedom, too. “So long as you’re hitting these minimum thresholds, the budget becomes less of a necessity,” says Corrado.
  2. Focus on the Big Picture
    Can it be helpful to look over your debit card statement to know where your cash is going? Sure. In fact, Corrado says new clients, in particular, can benefit from tracing their expenditures for three months or so. (He likes the Mint app for its ease of use, although other tools can also help you get a handle on your transactions.)
    But the point isn’t to flog yourself over every visit to Starbucks or trip to the McDonalds drive-thru — it’s to recognize the larger trends at play. Maybe what you thought of as a once-in-a-while habit of streaming videos is actually costing you $50 a month. Once you know that, you can do something about it.
    “The trouble is when you trying to detail everything out immediately,” says Corrado. So, don’t lose the forest for the trees — the more important thing is to know how much you’re spending overall and which expense categories are really pulling you back over a period of weeks.
  3. Pace Yourself
    Uber-ambitious targets sound great. In reality, they fail miserably in most cases. Corrado uses the example of a couple who hopes to cut their $6,000-a-month spending habit down to $5,000. Chances are it’s not going to happen in one fell swoop. “They tend to get discouraged and stop altogether,” he says.
    One of the strategies Corrado likes is setting it up so your entire paycheck goes into a savings or brokerage account. That first month, you might divert the entire sum into your checking account. By month number two, try scaling that transfer back so that $50 stays in savings, and so on. It’s about baby steps.
    Not only are you less likely to get totally discouraged, but with less money at your disposal you’ll have a harder time falling into what Corrado calls “lifestyle creep” – that unwitting tendency to start spending more than you can actually afford.
  4. Know What You’re Aiming For
    One of the linchpins of effective budgeting is simply having awareness, says Corrado. Unless you know what your spending and savings habits are, you’ll be stuck in first gear.
    But there’s an emotional component to it as well. Simply put, we need inspiration. That’s why Corrado emphasizes “goal visualization” — the ability to see the light at the end of the tunnel. For younger workers, it might be the down payment on a new home. For folks in middle age, a retirement in 10 years is more likely the next milestone.
    Some planners actually recommend naming your savings accounts, be it “home purchase,” “new car,” or whatever your goal is. It’s a mental trick that helps you focus on the end goal and makes you feel like your financial sacrifice is doing some actual good. As Corrado puts it: “If your goals are uncertain, it’s a lot harder to actually feel like you want be intentional.”

How to Be Responsible With Money

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Manage your money; manage your life

Couple Elle Hall-Colemanand Dee Coleman specialize in helping women get their money — and their lives — under control

Tammye Nash | Managing Editor
[email protected]

Love of money, as the old adage goes, is the root of all evil. Regardless whether that is true, the fact remains that money management — or mismanagement, as it were — is the root of many problems in relationships of all types.

Elle Hall-Coleman and her wife Dee Coleman know that from personal experience. But they found answers for themselves, and now that are sharing their answers with others through Girlfriend’s Budget, “a financial lifestyle blog for women.”

Elle’s father was a banker, and her mother was an accountant, she said. Both her parents had grown up poor, she said, and after establishing themselves in their careers, they were determined that their own children would know how to manage money from the start.

Dee, though, had a different experience with money. Her own childhood had been fraught with financial instability, and she had learned to see money as a way of both expressing love and exerting control over others.

After the two of them became a couple, some seven and a half years ago, their different approaches to money became a problem, until they finally decided to sit down together, get things under control and set a path for moving forward.

“Initially, the money issue was a real struggle for us,” Dee said. But then, Elle added, “We had a sit down, come to Jesus meeting about it. … First we educated ourselves, and then we decided to teach others.”

The two of them talked about things like what a budget actually looks like, organizing money and scheduling so that bills are paid on time and credit is properly managed and improved. It was during this process, Elle said, that Dee turned to her and said, “You really need to teach other people how to do this, too.”

Girlfriend’s Budget, Elle explained, is all about financial literacy. And while it is primarily aimed at women, anyone who wants to get a better handle on handling their money can benefit.

Money management is a skill many people don’t learn from their parents, and it’s not taught at school, the two said.

“Our goal is to educate women on money management because so many women don’t have the chance to learn that anywhere else,” Elle said. “Women typically make less than men, and in the LGBT community, when you are talking about two women living together and running a household, knowing how to manage your resources is essential.”

But, she added, “It’s not just about the numbers. It’s about empowerment, about helping women find their voice.” And money management is a large part of that, she said, because “Money is the power that speaks.”

That’s where Dee comes in. As a certified spiritual mindset coach, she works with Elle, the budgeting expert, to offer clients “the best of both worlds. We help them learn to manage their money, and we help them learn to change their mindset. We help them dispel that negative aura so many people have around money because of things they have been taught all their life. We help them change their perspective around money and on life in general.”

Their goal in combining their two areas of expertise, the women said, is to help their clients find not just financial freedom, but also freedom from within.

Dee explained that as she and her wife moved through their own money management journey, “I realized just how the struggle around money had changed me. Some people are not willing to work on those issues. But you need to get to the root of things before you can change them.”

Some people, for example, are “emotional spenders,” Elle said. “They have a void in their life, and they make all these purchases to try and fill that void.

Dee says to them, ‘Let’s get to the root of the issue.’ It’s like therapy in a way.”

Dee added, “If they understand why they do these things, then they can work to crate positive change. I think this something that is very much needed, is especially in the LGBTQ community, where we can get so focused on acceptance, on being loved. People in our community so often want to be seen and accepted in a certain light, so they spend money to feel good about themselves or to look good or be accepted.”

Both women come equipped with the education and the experience to fill their side of the equation in their business.

Elle has a bachelor’s degree from the University of Texas at Dallas in arts and technology (“I thought I wanted to be an animator for movies when I was younger”) and a master’s in business administration from Texas Women’s University, and years of experience in the corporate world, including a stint with the Dallas Independent School District where she helped develop budgets.

Dee earned her bachelor’s degree from the University of Texas at Arlington then went on to get a master’s degree in psychology from UTA. She worked for Child Protective Services for six years and for a small company providing services for people with mental health disabilities for about a year before starting her own career as a life coach.

Elle developed “Girlfriend’s, Budget! Level Up Your Money, Level Up Your Life System,” which is a series of six “inner and outer financial freedom building steps to help established career women get out of their own head, and financially leverage themselves to follow their dreams.”

Dee, whose website is at DeeToxLifeCoaching.com, developed her own Dee’Tox Signature System, an eight-step program to promote spiritual and emotional healing.

Working together, the women offer a free 30-minute consultation, then from there clients can choose one-on-one counseling or a more affordable group counseling option. But they don’t work with everyone who approaches them, they said.

“We are selective about our clients,” Elle said. “We don’t want to waste our time or their money trying to work with people who aren’t really ready to change. But if you really want to change, we can help.”

Dee concluded, “The way most people are going, they are going to have to work til they drop dead at their job because they do not manage their money well. But it doesn’t have to be that way. Just reach out and ask for help. Go within and ask yourself, are you ready to put yourself first for a change?”

Md. must address OPEB debts

Just like Montgomery County, Maryland used to pay OPEB expenses as they came up, a method known as “pay-as-you-go.” This was fine, initially, when Maryland and other states had relatively few retirees and near-retirees, but the fiscal calculus changed as the size of state workforces grew, making it necessary for states to pre-fund these benefits in order to avoid a severe future financial reckoning. In 2008, the federal Government Accounting Standard Board advised all states and localities to create OPEB trust funds and begin pre-funding the OPEB the same way pension funds are funded.

What You Don’t Know About Your Parents’ Finances Could Ruin Yours

 

I wasn’t too surprised when personal finance website GOBankingRates recently released a survey that found that 73% of Americans haven’t had conversations with aging parents about their finances. After all, most people are too busy trying to figure out their own finances to think about having money talks with their parents.

What did surprise me, though, was that 22% of the survey’s respondents said that they never plan to have this conversation with their parents because they think their parents’ finances are none of their business.

It’s one thing to assume that these conversations can wait until a health or financial emergency makes them necessary. But avoiding money talks with your parents altogether can be a mistake.

“If you don’t take the time to talk to your parents about their finances, your own finances could take a hit,” said Cameron Huddleston, author of the new book “Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances.” Why? There’s a good chance you’ll have to get involved with your parents’ financial lives as they age, she said. That can affect your own financial well-being if you aren’t prepared for that role.

You Might Have to Care for Your Parents

It’s well-known that Americans are living longer.  With longer lives, though, comes an increased risk of health issues. About 80% of older adults have at least on chronic disease such as heart disease, cancer, stroke, diabetes or dementia and Alzheimer’s disease, according to the National Council on Aging.

The latter – Alzheimer’s disease – is becoming increasingly prevalent as people live longer. The number of Americans living with Alzheimer’s disease is expected to more than double to 14 million by 2050, according to the Alzheimer’s Association.

Huddleston’s mom was diagnosed with Alzheimer’s disease when she was 65. Because her mom was divorced and living alone, Huddleston had to step in and start helping out her mom. For a few years, her mom lived with her – forcing Huddleston to juggle caregiving with her job as a financial journalist and her role as a mom of three children.

“My biggest regret is not talking to my mom about her finances before she started losing her memory,” Huddleston said. “She didn’t have long-term care insurance, and we didn’t have a plan for paying for the care that she needed.”

Only 5% of adults ages 55 to 60 have long-term care insurance, and only 11% of adults 65 and older have a policy, according to the Urban Institute. Long-term care insurance helps cover the cost of care in an assisted-living facility, nursing home or even at home. Medicare does not pay for this sort of care – which can be more than $8,000 a month.

It’s important to find out whether your parents have long-term care insurance or savings to cover this sort of care because, according to the Bipartisan Policy Center, 70% of adults 65 and older will need long-term care at some point.

“If you and your parents don’t discuss and prepare for how to pay for any care they might need, you could become your parents’ long-term care plan,” Huddleston said. “That could force you to cover the cost or stop working to help care for a parent.”

You Might Have to Help Support Them Financially

Even if your parents don’t need long-term care, they still might need your help as they age. A report published by the Stanford Center on Longevity found that half of Americans aren’t financially prepared for longer lifespans.  Your parents could be a part of this disturbing statistic.

They might not have enough saved for a comfortable retirement. In fact, your parents might be among the quarter of Americans who have no retirement savings. They might be drowning in mortgage, credit card or even student loan debt they took on to pay for your college education. They might have skyrocketing health care and prescription drug costs that they’re struggling to pay.

Huddleston said she interviewed several people for her book, “Mom and Dad, We Need to Talk,” who know they likely will have to help out their parents as they age because they aren’t doing well financially. Those who haven’t had detailed conversations with their parents about their finances expect to face a bigger burden than those who’ve been able to help their parents start managing their money better by having discussions with them, she said.

“Too many people think that only wealthy families need to be having money talks,” Huddleston said. “However, it’s even more important for adult children whose parents aren’t doing well financially to start having family money talks because they will more likely have to get involved with their parents’ financial lives.” Knowing sooner rather than later how much financial support you might have to provide parents can help you take steps to prepare your own finances.

“If you have siblings, it is important for all children to be in the loop regarding the parents’ finances, especially if it’s likely that they all would have to contribute toward taking care of their parents in the near future, whether it be a medical expense or even funeral expenses”, says Luis F. Rosa, financial planner and founder of Build a Better Financial Future, LLC, a virtual financial planning firm that focuses on financial planning for generation X. “Having the conversation among siblings will help all parties involved be better prepared. The last thing you need is a surprise costly financial obligation while at the same time dealing with the emotional stress of seeing a parent sick or deceased.”

You Might End up in Court

The most important reason to talk to your parents about their finances sooner rather than later is to find out whether they have a will, power of attorney and living will or advance health care directive, Huddleston said.

A will spells out who gets what when you die. If you die without one, your state law will dictate who gets your assets. There are countless stories of families who end up in court battling it out over who gets what after a family member dies without a will.

A power of attorney document lets you name a person or people to make financial decisions for you if you cannot make them yourself. And a living will or advance health care directive specifies what sort of end-of-life medical care you would or would not want – such as life support – and lets you name someone to make health care decisions for you if you can’t. 

These legal documents must be signed while a person is mentally competent. If your parents don’t have these documents and a health issue compromises their mental capacity, they won’t be able to sign them and give you, your siblings or other trusted family members or friends the legal right to make financial or health care decisions for them. At that point, you would have to go through a lengthy and expensive court process to gain the legal right to make financial or health-care decisions for them.

Huddleston said she interviewed a man who spent $10,000 and nine months going through the court process to become his dad’s conservator because his dad had not named him power of attorney before he developed Alzheimer’s disease. If he had been named power of attorney while his dad was still competent, the son would have been able to access his dad’s bank account to pay his medical bills without having to go to court to prove his dad was no longer able to manage his finances on his own.

There is a cost to having estate planning documents such as a will, living will and power of attorney drafted by an attorney. But the several hundred dollars your parents would pay for these documents pales in comparison to the several thousand dollars you could pay if you end up in court if your parents didn’t have the documents and you needed the legal right to make financial or health care decisions for them or to divvy up their assets after their death, Huddleston said.

“Having legal documents in place that clearly specify your parent’s wishes are so important especially in light of the “coping gap” that occurs when they pass. Grief makes facilitating estate affairs so much more difficult on its own. A properly organized legacy plan provides the children an opportunity to “literally” get on the same page with their parents via a living trust package,” says financial planner Anthony Montenegro of The Blackmont Group

How to Talk to Your Parents About Their Finances

Your parents likely won’t think you’re being nosy by asking them about their finances if you let them know you want to have the conversation to be prepared in case they ever need your help, Huddleston said. “The key is to let them know that you’re looking out for their best interests,” she said.

You could start the conversation by asking your parents what they have in place to deal with “what if” scenarios. For example, you could ask what would happen if they had a health emergency and ended up in the hospital and you or your siblings needed access to their financial accounts to make sure their bills were paid, Huddleston said. Or you could ask whether they would want care in their home or a facility if they ever needed long-term care and whether they have a way to pay for that care.

Or you could start the conversation by talking about your own financial planning experience. You could tell your parents you recently had a will drafted and want them to know where to find it if something happened to you, Huddleston said. Then you could ask where their estate-planning documents are so you’ll know in case of an emergency. 

Jose V. Sanchez, a certified financial planner in Albuquerque, New Mexico can relate to this situation all too well. He adds, “I realized that my father had created online bill payments, online accounts for the utilities, and the like. None of this was shared with anyone including my mother who is not computer savvy. I then shared with them our experience with Everplans and showed the systems that helped us get organized and systematically address our digital estate.”

Sharing stories about people you know who had to care for a parent or deal with the fallout after a parent died without a will can open the door to conversations about long-term care and estate planning. Huddleston offers several more ways to get the conversation started, what information to gather and how to get through to reluctant parents in her book. “As difficult as these conversations might seem, the consequences of not having them can be far worse,” she said. “So start talking today.”

 

4 Types of Investment Accounts You Should Know

If you like having options, you’ve got plenty when it comes to investment account types. What’ll it be, an IRA? Taxable account? College savings account? That’s one of the first questions financial firms ask when you set up an account.

This guide to the various types of investment accounts will help you find the best one based on your savings goals, eligibility, and who you want to retain ownership of the account (yourself, you and someone else, or even a minor).

Investment account types

1. Standard brokerage account

A standard brokerage account — sometimes called a taxable brokerage account or a non-retirement account — provides access to a broad range of investments, including stocks, mutual funds, bonds, exchange-traded funds and more. Any interest or dividends you earn on investments, as well as any gains on investments that you sell, are subject to taxes in the year that the money is received.

With a non-retirement account you have a choice in how it is owned:

  • Individual taxable brokerage account: Opened by an individual who retains ownership of the account and will be solely responsible for the taxes generated in the account.
  • Joint taxable brokerage account: An account shared by two or more people — typically spouses, but it can be opened with anyone, even a non-relative.

When you open a brokerage account, the firm will likely ask you whether you want a cash account or a margin account. A cash account is appropriate for the majority of investors. It allows you to buy investments with money you deposit into the account. A margin account is for investors who want to borrow money from the broker to buy investments. Margin trading is a riskier type of investing that is best suited for advanced traders.

Eligibility: You must be a legal adult (at least 18 years old) and have a Social Security number or a tax ID number (among other forms of identification) to open a brokerage account.

Good to know: There are no limits on how much money you can contribute to a taxable brokerage account, and money can be withdrawn at any time, although you may owe taxes if the investments you sell to cash out have increased in value.

Here are three brokerage firms that earned high marks in our reviews:

Open Account

Trade Fee

$4.95

$4.95

Account Minimum

$0

$0

Promotion

Up to $3,500

Up to $3,500

in cash bonus with a qualifying deposit

Open Account

Trade Fee

$6.95

$6.95

Account Minimum

$500

$500

Promotion

Up to $600

Up to $600

cash credit with a qualifying deposit

Open Account

Trade Fee

$6.95

$6.95

Account Minimum

$0

$0

Promotion

60

60

days of commission-free trades with qualifying deposit

2. Retirement accounts

A retirement account, such as an IRA, or individual retirement account, is a standard brokerage account with access to the same range of investments. The biggest difference between a retirement account and a brokerage account is how the IRS taxes — or doesn’t tax — contributions, investment gains and withdrawals.

The most common types of retirement accounts are traditional IRAs and Roth IRAs. Many brokers also offer specialty retirement savings accounts for small-business owners and self-employed individuals, such as SEP IRAs, SIMPLE IRAs and Solo 401(k)s. If the company you work for offers a 401(k) plan and matches any portion of the money you save in that account, contribute to the 401(k) before funding an IRA.

Depending on the type of IRA you choose, you get either an upfront tax break in the year you make contributions to the account (with a traditional IRA) or a back-end tax break that makes your withdrawals in retirement tax-free (via a Roth IRA). Joint IRAs are not allowed.

» All your IRA questions answered: See NerdWallet’s IRA Guide

Eligibility: You must have earned income (or a spouse with qualified earned income) to be eligible to contribute to an IRA. There are also income limits for contributing to a Roth IRA and for deducting contributions to a traditional IRA. Read more about IRA eligibility rules here.

Good to know: The maximum an individual is allowed to contribute to an IRA in 2019 is $6,000 if you’re under age 50, and $7,000 if you’re 50 or older. Per IRS rules, there may be taxes and penalties for dipping into IRAs before age 59 ½. If you think you’ll need access to the money early, the Roth IRA provides more penalty-free options.

These providers offer ample tools and guidance for savers looking for a place to open an IRA:

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3. Education accounts

One of the most popular types of accounts used to pay for education expenses is the 529 savings plan. (This is different from 529 prepaid tuition plans that let you lock in the in-state public tuition at the institution that runs the plan.) Most states offer their own 529 plans that you can open directly, but typically the money can be used at eligible schools nationwide. Some brokerages also allow you to open a 529 account. For example, TD Ameritrade offers 529 accounts through Nebraska’s plan, and Wealthfront offers them through Nevada.

Another education savings option is the Coverdell Education Savings Account. An ESA must be set up before the beneficiary is 18, and, like 529s, the money can be used for college, elementary and secondary education expenses.

Eligibility: Relative or not, anyone can contribute to these plans on behalf of a beneficiary. And anyone can be named a beneficiary on the account, as long as the money is used for qualified education expenses.

Good to know: Contributions to 529s and ESAs are not tax-deductible (though you might get a state tax deduction on 529 contributions), but qualified distributions are tax-free. The IRS allows people to contribute up to $15,000 per beneficiary into 529s in 2019 without having to worry about federal gift taxes. The maximum allowable contribution to an ESA is $2,000 a year (as long as you fall below a certain income level) until the beneficiary’s 18th birthday.

4. Investment accounts for kids

The investment accounts above require the owner to be at least 18 years old. But what about brokerage accounts for the budding young Buffett you know? There are a few options to accommodate minors:

Custodial brokerage account

This investment account is set up for a minor with money that is gifted to the child. An adult (the custodian) maintains account control and transfers assets to the child when he or she turns the “age of majority,” which is either 18 or 21, depending on state laws.

Two types of custodial accounts are the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). The difference is the type of assets you’re allowed to contribute to the account. UTMAs are able to hold real estate, in addition to the typical investments allowed in both types of accounts (cash, stocks, bonds, mutual funds). Once the money is in the account it cannot be transferred to another beneficiary.

Eligibility: A child does not need earned income for a UGMA. Some states allow UGMAs, some allow UTMAs and some allow both. A broker can determine whether your state allows you to open one for a beneficiary.

Good to know: Unlike money in an education account, money put into a UGMA or UTMA can be used for any purpose, not just college tuition. And be aware that if the child applies for financial aid, the assets in a custodial account are considered the student’s and can impact their eligibility and the amount of the aid package.

Custodial IRA

If a child has earned income, they are eligible to contribute to a Roth or traditional IRA. The account is set up and maintained by an adult who transfers it to the child when they turn 18 or 21.

Eligibility: The earned income can come from anything, including babysitting, an informal lawn-mowing business or Instagram sponsorships, as long as it is reported to the IRS.

Good to know: In a Roth IRA, contributions — but not investment earnings — can be pulled out at any time without incurring income taxes or an early withdrawal penalty.

» Here’s more on how to open a brokerage account for your kids

Where should you open your investment account?

Most financial institutions offer, at a minimum, standard brokerage accounts and IRAs. Many also offer education savings accounts and custodial accounts.

If you want to pick and manage your investments on your own, opening an account at an online broker is the way to go. Here’s our list of the best online brokers for beginner investors.

If you want someone to manage your money for you, a full-service broker (a firm with an investment advisor calling the shots) or a robo-advisor can take the reins. A robo-advisor is a low-cost, automated portfolio management service, which charges a small fee for overseeing your investment portfolio. Here are the robo-advisors we recommend.

How to Manage Your Roth 401(k) at Work

If you’re lucky enough to have a Roth 401(k) at work, you might have a boatload of money in your traditional 401(k).

And if that’s the case you might want to investigate converting some or all your traditional 401(k) funds into your Roth 401(k) — over time or all at once. You might also think about contributing to your Roth 401(k) instead of your traditional 401(k) as well. Both tactics are designed to help you create tax-efficient income in retirement. But any time you convert money to a Roth account, there are a few key variables to consider.

Does your plan allow conversions?

First off, you need to determine what your 401(k) plan permits, says Marcia Wagner, the founder and owner of The Wagner Law Group. “In-plan Roth 401(k) conversions are not a required Code provision and, even if the plan permits them, there might be some limitations, such as being limited to active employees,” she says.

But even if you plan permits such conversions, you have to decide if it makes sense. “The decision to convert 401(k) money into a Roth 401(k) should be based on the same variables that apply for converting a traditional IRA to a Roth IRA, says Tim Steffen, director of advanced planning at Baird Private Wealth Management. “Don’t let the fact that it’s inside your employer’s retirement convince you that this decision is any different.”

Do you have cash to pay for the taxes due on the conversion?

The primary tax advantage is that distributions from a pre-tax account are tax-deferred, while distributions from a Roth 401(k) account are excluded from tax, so long as the applicable age and service limitations on distributions from such accounts are followed, says Wagner.

But if you decide to do in-plan Roth 401(k) conversion remember that it’s a taxable event on the federal level, and depending upon the state, at the state level as well, says Wagner. In essence, the amount you are converting is a distribution and taxed as ordinary income. You won’t, however, have to pay a 10% early distribution penalty if you’re under age 59½.

Steffen says it’s a good idea to make sure you have cash available to pay the tax that’s due on the conversion. “This is even more important with 401(k) conversions than with IRA conversions,” he says. “If you convert an IRA, you can easily keep some of the money from the conversion aside to pay the tax. We would never recommend that, as using IRA dollars to pay conversion tax never makes sense, but it’s at least an option.”

With a 401(k) conversion, however, you likely can’t access any of that money until you leave the employer, so you really need to make sure you have other money available to pay the tax, says Steffen.

What’s the tax cost?

Steffen also recommends asking the following question when contemplating a 401(k) Roth conversion: What is the tax cost you’re going to pay to convert today, as compared to the tax cost you would pay if you withdrew the money from the traditional account during retirement? “It’s very hard to justify paying a higher tax cost now than you would in retirement,” he says.

If you’re a younger worker, with a relatively low income level, your tax rate today might be less than it would be in retirement, says Steffen. “But if you’re older and well established in your career, right now you might be paying the highest tax rate you’ll ever pay in your life since most people see their income fall when they switch from working to retirement,” he says.

How soon will you need the money you’re putting in the Roth?

According to Steffen, a Roth conversion, of any kind, means you’re accelerating a tax liability that could have been deferred perhaps for many years, even decades. “To justify that accelerated tax cost, you need to give the Roth money time to grow tax-free,” he says. “Converting today and then withdrawing the funds shortly after doesn’t allow you to recover that tax cost.”

As for what that time frame is, Steffen says it’s at least a few years, but the longer, the better.

It’s irreversible.

One drawback to doing a Roth 401(k) conversion, according to Wagner, is that the decision to convert is irreversible. “Recharacterization back to a pre-tax account is not permitted,” she says.

The difference between the two Roth accounts:

Steffen also says there’s one significant difference between Roth 401(k)s and Roth IRAs. In both accounts, he says the plan needs to be open for at least five years for the earnings in the account to be tax-free upon withdrawal. “There are other requirements as well, but that’s the first one you must meet,” he says.

If you convert to a Roth 401(k), your five-year window begins Jan. 1 of the year you first put money in that account, says Steffen. “The same applies for a Roth IRA,” he says.

However, when you roll money out of the Roth 401(k) and into a Roth IRA at retirement, that five-year window will reset, says Steffen. “You can’t use the time in the Roth 401(k) to count towards time in the Roth IRA. “If the Roth 401k has been open for more than five years, you may be able to withdraw earnings from the account tax-free,” he says. “If you roll that money to a new Roth IRA, however, that five-year window starts over.”

The better thing to do, he says, is to roll the Roth 401(k) money to an existing Roth IRA. “In that case, the five-year window on the Roth 401(k) dollars will go back to when the Roth IRA was opened,” says Steffen.

If you don’t have a Roth IRA today, but you do have a Roth 401(k), Steffen says it probably makes sense to open a Roth IRA now to get that five-year period started. “Then when you roll the Roth 401(k) into that Roth IRA, you don’t have to start all over,” he says.

Note, however, Roth IRA contributions have limits based on your income. This table shows whether your contribution to a Roth IRA is affected by the amount of your modified AGI as computed for Roth IRA purposes.

Should you start contributing to a Roth 401(k) instead of a Roth 401(k) conversion?

For the contributions, you have to look at what’s more valuable – the tax deduction today or the tax-free income in the future, says Steffen. “If your future tax rate will be lower, then the traditional makes more sense — get the deduction now at a higher rate, then have taxable income in the future at a lower rate,” she says. “That’s probably the case with older, more established workers.”

Younger workers, on the other hand, would probably benefit from the Roth to start, says Steffen. “They have lower income now, so the deduction isn’t as valuable to them today as the tax-free income will be in the future,” he says.

From a pure math standpoint — if your current and future tax rates are the same — the Roth and traditional plan work out to be the exact same.

Steffen gave this example: Say you contribute $18,000 to a traditional 401(k) that earns 7% every year. After 30 years you’ll have $1,700,294. But if you tax adjust that for a 25% income tax, you really only have $1,275,221.

On the other hand, if you pay the same 25% tax on the $18,000 and then put the balance in the Roth, your contribution is just $13,500. If that grows at 7% for 30 years, the Roth will be worth the same $1,275,221.

If the future tax rate is higher — say 30% — the traditional is really only worth $1,190,206, while the Roth is still worth $1,275,221.

If the future tax rate is lower — say 20% — the traditional is now worth $1,360,235, compared to the Roth at $1,275,221.

“There’s also the concept of ‘tax diversification,’ where you ignore any tax issues today and instead focus on creating different pools of money to withdraw from in the future, knowing that tax rates could be literally anything in retirement,” says Steffen.

It’s never too late – or too early – to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet’s Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.

How to help teenagers manage their money

Parents and carers play an important role in shaping their children’s financial behaviour and attitude towards money. Many teenagers rely on their mum or dad to set the right example when it comes to managing finances. Of course it is not always easy to talk to teenagers about money, particularly as they approach adulthood. Bearing that in mind, we have pinpointed areas where you can help prepare your children to navigate the tricky waters of personal finance, according to www.moneyadviceservice.org.uk.

  1. Give teenagers financial responsibility

Sharing responsibilities with your children.

It is important that teenagers recognise the value of money and understand that it is not an unlimited resource.

Giving them the freedom to manage their own budget will teach them valuable lessons about:

  • Only spending what they can afford, and
  • Avoiding the pitfalls of unplanned expenses.

Pocket money and budgeting

For many people, pocket money is the first taste of financial responsibility.

Providing your teenager with a regular, set amount of money and the responsibility of paying for something they want gives them their first opportunity to practice how to stay within a budget.

One way to get teenagers to take responsibility for their money is to give them a set budget for a specific task.

This could mean setting your son or daughter a monthly budget for their lunch.

If they take this money and spend it on clothes, or going out, then they would learn a valuable lesson when they find themselves stuck having to bring in sandwiches from home.

Part of teaching your teenagers how to manage their finances comes down to being strict with the money you give them and not bailing them out if they overspend.

Better they learn the hard way now while the amounts are small, rather than later when overspending can lead to problem debt.

A research has shown that nearly eight in ten 15–17 year olds who cover unexpected mobile phone expenses from their own pocket say they keep track of their income and spending.

Just over half of those who turn to mum and dad to cover unexpected costs claim to keep an eye on their financial incomings and outgoings.

  1. Set the right example

Learning from parents and carers

When it comes to managing finances, many teenagers mimic their parents’ behaviour.

So, if you are the type of person who saves up to buy something, then it is more likely that your children will do the same.

If, on the other hand, you are quick to turn to credit to fund non-essential purchases, your children are likely to follow in your footsteps.

One way of setting the right example is by including your teenagers in some of your financial decisions, particularly as they reach their late teens.

This could include showing them how you shopped around for a better deal on your current account, or sitting down with our budget planner tool to work out a monthly budget.

You can take this a step further and send them out to do some grocery shopping with a list and strict budget.

Just be careful you don’t end up with a kitchen full of sweets and crisps!

It is also a good idea to be open with your children about some of the financial mistakes you made when you were younger.

Sharing your tales of woe can be a good way to highlight the dangers of poor money management.

Whether this means telling them about the time you could not afford to fix the fridge after it broke down, or how not getting your home insured cost you thousands after a burglary.

These are valuable lessons you can share.

Developing a savings habit

Learning about the importance of saving and only buying things which you can afford is an important part of adult life.

Whether this means encouraging your teenagers to put aside a small amount every week to buy new shoes, or longer-term planning for a larger purchase, leaning to save is a vital skill.

Without it, your children might not be able to achieve their long term goals, such as:

  • Buying a car
  • Going to university, or
  • Providing a home for their family.

It can be difficult to talk to teenagers about the need to save.

However, there are certain opportunities you can seize.

If, for example, your teenager is interested in taking driving lessons, this is a great time to sit down with them and work out how to meet the cost.

This might mean looking at how much needs to be put aside each month, or searching for a part time job.

  1. Help them manage their first wage

If your teenager is trying to save up for a large purchase, or simply wants some extra spending money, one option is to find a job.

Getting a job can be a teenager’s first step towards financial independence and can play a key role in preparing them for the future.

While many teenagers take on informal employment such as babysitting for family friends, anyone over the minimum school leaving age can work full time.

If your child does get a first job, this will often result in an increase in the amount of cash available to them.

This is great opportunity to put some time aside and talk to them about the importance of saving.

This can be as simple as deciding to put aside a certain sum each month for a rainy day, or, if they have a set goal, helping them make sure they reach it.

For example, if your teenager would like to buy a car, you could show them how to set-up a standing order to their savings account each pay day.

This will make saving automatic and make it easier for them to stick to their budget.

You can also help them understand their payslip and talk them through everything they need to know to make sure they are signed up to the right bank account.

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How Should Entrepreneurs Manage Their Debt?


You’re reading Entrepreneur India, an international franchise of Entrepreneur Media.

Starting your own business requires a lot of capital upfront which implies raising capital either in the form of Debt or Equity.  An Entrepreneur would have saved a certain portion of his capital to invest in the business, but that might not be enough. He would be needing additional funding to run and grow his business and meet the day to day needs. A start-up usually takes about 3-5 years to generate profits. Hence, debt is a huge component during that time. Unlike the salaried, an entrepreneur does not have a regular monthly cash flow and is bound to encounter ups and downs in their cash flow. During this time, it is important to manage your money effectively and cut down on unnecessary expenses, while growing the business.

Before taking on any debt, an entrepreneur should keep the following key points in mind –

Know the Sources of Financing Available – Choose the Best Option

Large businesses with an investment-grade rating and stable cash flows will get favourable debt terms. Whereas, a small business set up might not. The sources of funding available to business owners are:

  • Family or Friends 

One of the best sources of funding that a small-scale entrepreneur or someone who is just starting can opt for is through family or friends. This is the easiest and fastest source and usually requires no documentation and collateral.

  • Debt – Banks and Financial Institutions

This involves Secured Loans that are backed by an asset (house, car etc) and includes, Business Loan or Equipment Loan, Overdrafts against Fixed Deposits, Loan against Property and Investments etc. Another type of loan is unsecured loans which are usually riskier and carry a higher rate of interest and includes, Personal Loan and Credit Cards.

Also, at an early stage, one may lack access to debt instruments, bank loans or capital markets. In this case, one may pitch their ideas to Venture Capitalists, that provide funding to start-up companies and small businesses that have long-term growth potential. They also open doors to raising further capital. In such a scenario, the Venture Capital investor would get an equity stake in the company.

One should raise capital from the source that best suits their business and would minimize the cost.

Set a Budget

Analyse your budget. Start planning on where you would be spending your money and get an idea on your variable and fixed costs that you would be incurring. The aim is to reduce unnecessary costs and identify areas that are not necessary for business daily operations and cut it down. Keep a track on the cash flow you are generating. According to that, decide on the debt and equity funding that you would be requiring and restrict your borrowings to the extent needed. Do not overstretch your budget!

Keep in mind the Cost of Debt

With Debt, comes interest payments. It is very important to understand your actual cost of borrowing and make sure you can afford that debt. You must make timely interest payments. Any default could have a bad impact on your credibility and could have disastrous consequences. Use debt wisely by utilizing low-interest loans (Family, friends, overdrafts from FD’s, Mutual funds and properties ) These usually come at a lower rate of interest than personal loans and credit cards. Personal loans should be the last resort to fund personal and business needs. Also, make sure your return on equity is more than the cost of debt. Otherwise, you will be incurring a loss. You must aim to minimize the cost of debt while maximising growth.

Prioritize Your Debt Payments

Maintain a list of all debt payments that need to be made. Segregate the large payments and debt that has the highest rate of interest, make sure you pay them off first.

Create Liquid Assets

In case of any contingency, it becomes difficult to service debt payments. Hence, you must ensure that you have enough liquid assets to meet any contingency. Running up huge liabilities without enough liquid assets is not a good idea.

For an entrepreneur, debt is unavoidable and can be a useful tool to help start and grow your business, if managed well. Use debt to create assets to boost your income and grow your business rather than taking debt for things that will not add any value. If you fail to make payments on time, the result could be disastrous and could lead to legal proceedings, bankruptcy etc.