Recording Now Available - The Business of Family Child Care: Money Management & Retirement with Tom Copeland
A recording of the webinar "Money Management & Retirement with Tom Copeland" is now available.
In this webinar I covered how family child care providers can save more money for retirement and will learn how to invest using the various IRA plans available. In addition, I spoke on how to:
- Identify ways to reduce expenses.
- Recognize where to put money to meet short- and long-term goals.
- Prioritize long-term financial goals.
- Understand the five basic rules of retirement planning.
- Gain knowledge about IRA retirement plans for providers (e.g., traditional IRA, Roth IRA, SIMPLE, SEP).
Here's a link to the webinar recording.
Here's a link to the power point slides.
Here are some of the questions and answers from the webinar:
Individual Retirement Account
Q: How much should I be putting into my IRA each month?
A: This is not a simple question. It totally depends on your age, how much you have previously saved for your retirement, how much you will need in retirement, and other income you may be receiving in retirement. In general, you will need about 70-80% of your current income to maintain your current standard of living in retirement.
Q: What type of retirement accounts should a sole proprietor own?
A: There are several IRA accounts that the vast majority of providers can contribute to. They are: Regular IRA (also known as the Traditional IRA), Roth IRA, SIMPLE IRA and SEP IRA.
Q: For an individual home daycare provider, should I set up a SIMPLE IRA or a Roth IRA? Or both? Should I start putting a portion of my income towards quarterly tax bills or have my husband start withholding more from his paychecks?
A: I like a Roth IRA above all other IRAs. That’s because although you don’t get a tax deduction when you make your contributions, you will not pay any taxes on your contributions or the interest earned when you withdraw them in your retirement. You can contribute to both a SIMPLE IRA and Roth IRA in the same year. Your first priority is to get the maximum contribution your husband’s employer can make on top of your husband’s contributions. After her has gotten the maximum employer contribution, you can start investing in your own IRA.
Q: What would be best way to invest in a 401K?
A: A 401K is a type of an IRA. You can set up a solo 401K plan, but I wouldn’t recommend doing so unless you have at least $10,000 or more than you can contribute to it each year. Instead, start with a Traditional IRA, Roth IRA or SIMPLE IRA, where the annual expenses are lower.
Q: What is the max I can put away a year for retirement?
A: The amount you can put away in an IRA each year depends on the type of IRA you invest in. You can contribute up to $6,000 a year in a Traditional IRA or Roth IRA. If you are age 50 or older you can contribute an extra $1,000 a year. You can contribute up to $13,500 into a SIMPLE IRA, and another $3,500 if you are age 50 or older. You can contribute up to about 18% of your profit into a SEP IRA each year. You can also save money for your retirement outside of an IRA and there is no maximum on how much this can be.
Q: Have you heard of “hiring” your children and establishing a Roth IRA for your children?
A: Yes, this can be a good idea. To do this you must have your child do work for your business and pay them a reasonable amount ($10-$15 per hour, perhaps). You can set up a custodial Roth IRA for your child and contribute your own money on behalf of your child.
Q: Can I contribute to all these vehicles and max them out? I'd like to shelter most of my CCRF grant funds and avoid the higher tax bracket.
A: You can contribute to both a Traditional IRA and Roth IRA in the same year, but the maximum you can contribute to both is $6,000 per year ($7,000 if you are age 50 or older). In addition, you can contribute the maximum to a SIMPLE IRA. You can’t contribute to both a SIMPLE IRA and a SEP IRA in the same year
Q: Can a provider contribute to her own IRA and then contribute to a spousal IRA for her husband that is her assistant?
A: Yes.
Q: Is the Roth IRA still the best choice for those of us that are within 10 years of retiring?
A: Yes, in my opinion. See my article for more on the Roth IRA:
Q: Is there a minimum age or minimum income to contribute to a Roth?
A: No, there is no minimum age requirement to be able to contribute to a Roth IRA. You, or your child, must have earned income and the amount you contribute to a Roth IRA for your child cannot be more than your child’s earned income.
Q: My tax accountant aid I can only put $7,500 a year total in an IRA but it sounds like you are saying I can do more if I put in more than one source.
A: I don’t know where the $7,500 number comes from. You can contribute up to $6,000 a year into a Traditional or Roth IRA each year ($7,000 if you are age 50 or older). In addition, you can contribute up to $13,500 into a SIMPLE IRA (plus an extra $3,500 if you are age 50 or older).
Q: You said that fist contribute to 401k, then a Roth and then what next?
A: If your spouse works for a company that offers a retirement plan, and the employer contributes to this plan, then your first priority is to ensure that your spouse invests enough in this retirement plan to get the maximum contribution from the employer. This is free money! After that, in my opinion, make the maximum contribution to a Roth IRA. If you still have more money to contribute to an IRA, either have your spouse contribute more to his employer plan or you can set up your own SIMPLE IRA.
Q: If you have a Roth IRA, can you file your annual contributions on your taxes as Family Childcare Provider?
A: No. You do not get a tax deduction when you make a contribution to a Roth IRA. Instead, you won’t have to pay taxes on either your contributions or the interest it earn when you withdraw the money at retirement.
Q: Being that Subsidy payments are paid through the state, are we considered as state employees? Can we tap into their 401k plans?
A: No, you are not a state employee when you participate in your state’s child care subsidy program. Therefore, you can’t be a part of their 401K plan.
Q: What’s the difference between and IRA and an ING Direct? Which one is best?
A: ING Direct is an online bank where you can generally receive a higher interest rate on your savings than from your local bank. It is not an IRA investment. You can put some of your retirement savings in an ING Direct bank as part of your fixed asset allocation.
Q: If you invest in long-term stocks for retirements along with saving for the Roth IRA, how can I label the long-term stocks for retirement without being taxed a lot.
A: Any investment in an IRA, other than a Roth IRA will be taxed when you withdraw the contributions and interest when you start taking distributions when you retire. I strongly recommend saving as much as you can within a Roth IRA to reduce the taxes you will owe when you retire.
Q: If I have a license with The Navy, can they open a 401k for me?
A: I don’t know the answer. Ask someone from the Navy if they have a retirement plan you can contribute to.
Money Management
Q: Should you save if you have debt?
A: Not a simple question. You want to reduce and eventually eliminate all debt, especially credit card debt. You don’t want to wait before you start saving for retirement until all your debt is eliminated. Do some of both.
Q: Besides an IRA, what sort of accounts should one open? Money Market checking? Regular savings?
A: You need to review your entire financial situation before trying to answer this question. You want to reduce and eliminate debt, you want to create an emergency fund, you want to eventually pay cash for a car, you want to have adequate insurance, and so on. When saving for retirement, you want the vast majority of your investments in an IRA. It also makes sense to have some retirement savings outside of an IRA, invested in money market funds, CDs and other fixed assets. It doesn’t make sense to invest money in a regular bank savings account because the interest rate is so low.
Q: Should you work on improving credit score or build savings?
A: It depends on what you will be purchasing in the next few years. If you are looking to buy a home, take out a home equity loan, borrow money to buy a car, or borrow money for any other purpose, it makes sense to improve your credit score. That’s because a lower credit score will result in paying higher interest rates on loans. If you don’t plan on borrowing money in the near future, increase your retirement savings.
Q: I have 0 credit card debt; I owe $1500 on car 3% interest and $2000 5% interest on hot tub. If I pay off and put monthly payments into savings, it’s going to hurt my credit rating that I worked so hard to achieve. Would it benefit me to pay off?
A: I’m not an expert on what affects your credit score. In my understanding, borrowing money and then paying off the loan will increase, not hurt, your credit score.
Q: Can you talk about I-bonds?
A: I-Bonds are savings bonds issued by the US government. They earn a fixed rate of interest that is higher than most other fixed assets. Investors should hold onto these bonds for at least a year and preferable for five years. They cannot be held within an IRA or Roth IRA, so the interest is taxable each year. I-bonds are a good option as part of fixed assets that you are investing for retirement.
Q: What's the max that you would recommend we should feel comfortable putting into an account that is uninsured?
A: This depends on many factors: how comfortable would you be if you lost all of this investment, how much you have saved in insured accounts and when do you need the money. Stocks and bonds are not insured, but the vast majority of the money you are saving for retirement should be invested in stocks and bonds.
Q: Most people recommend we have a 3-6 month emergency fund. I’m self-employed so I decided to save for 9 months. Should I lower it to 6 months and add the remaining to my IRA. I’m trying to increase my retirement contributions.
A: Congratulations on having a substantial emergency fund. I wouldn’t lower it to six months. I would not increase your emergency fund and start saving more for retirement.
Q: How long are short term bond funds?
A: Such funds invest in bonds that have a maturity date of less than five years. Bond funds are generally less of an investment risk than stocks and should be included as part of your fixed asset allocation.
Q: It is true that for solely proprietaries (LLC) is much better to obtain an SEP-IRA?
A: There is confusion in this question. A sole proprietor is different than a Limited Liability Company (LLC). I don’t recommend establishing an LLC unless you have consulted a tax professional and lawyer who can advise you about the consequences of doing so. Both a sole proprietor and an LLC can contribute to a SEP IRA.
Q: What if you are in your sixties with no retirement?
A: Unfortunately, this probably means you will have to work longer and live on less in retirement than if you have saved for retirement earlier in your life. However, it is still not too late to start saving for your retirement. Try to make it a high priority to save as much as you can towards your retirement going forward.
Q: Help! I am 58 years old and have no savings for retirement! I have been working hard to pay down my debt, so I won’t have to worry about that when I retire. What else can I do to prepare for retirement at this late date???
A: Try to reduce your monthly expenses as much as you can, so living on less in retirement will be easier. Hold off claiming Social Security benefits until you are age 70 if you can. Start contributing to an IRA, even before eliminating all of your debt. The tax advantages of contributing to an IRA will be more beneficial over time than the interest you are paying on your debt.
Q: How can we trust or find a good financial planner?
A: Here’s a good article on this topic: https://www.bankrate.com/investing/how-to-choose-a-financial-advisor/ I’ve also written about this in my book Family Child Care Money Management & Retirement Guide.
Q: Once you pay off your credit cards should you close them?
A: In general, it’s best to keep your credit card open even after you have paid off your debt. See: https://www.experian.com/blogs/ask-experian/if-my-credit-card-balance-is-0-should-i-close-the-account/
Q: What’s a good amount to put in an emergency fund?
A: My advice is to have at least three months of minimum living expenses in an emergency fund. If you can save more, do so.
Q: What are your thoughts on annuities?
A: This is a complicated question and the answer depends largely on your personal circumstances. There are a variety of annuities and they can be difficult to understand. In general, in my opinion, a fixed annuity that pays out a set amount for the rest of your life makes the most sense versus a variable annuity. If you choose an option that allows your spouse to receive annuity benefits after you die, the amount of the annuity will be smaller. Here’s some additional information: https://www.investopedia.com/articles/retirement/09/choosing-annuity.asp
https://www.nerdwallet.com/article/investing/buy-retirement-annuity
Social Security
Q: How am I paying into my Social Security? I file my child care taxes, but I don’t owe/pay taxes after I file?
A: If you are a sole proprietor you pay Social Security taxes on your profit when you file IRS Form 1040SE with your other tax forms. These taxes are owed whether or not you owe any federal income taxes or get a refund.
Q: If I have a licensed child care business incorporated, I am automatically contributing to my social security when I pay taxes or that is separated?
A: All child care businesses, regardless of their structure, pay Social Security/Medicare taxes. If you are incorporated and are an employee of your corporation, the corporation will withhold and pay Social Security/Medicare taxes on your behalf. If you are a sole proprietor, you pay these taxes when you file IRS Form 1040SE along with your other tax forms after the end of the year.
Q: I am 70 and still working. I am getting Social Security. I am still paying into Social Security. Do my Social Security benefits increase?
A: Yes, it’s possible that your Social Security benefits will increase if you continue to work after age 70. Your Social Security benefits are based on the higher 35 years of earnings over your lifetime. If the amount you earn in a year after age 70 is greater than what you earned earlier in your life (adjusted for inflation), then your benefits will be slightly higher.
Q: How about my husbands who passed away 4 years and I’m 60 years old? Can I get both his and mine at a later age?
A: This is a complicated question. Contact Social Security or a financial planner for help. See: https://www.aarp.org/retirement/social-security/questions-answers/survivor-and-retirement-benefits.html
Q: Will estimated taxes go toward Social Security?
A: Yes. When you pay quarterly estimated taxes some of the money can be credited to your Social Security/Medicare taxes.
Other
Q: What is the depreciation penalty if you sell your house and have not had 2 years since you stopped doing child care in the home?
A: The rule you are referring to expired many years ago. The current rules say that if you have lived in your home and owned it for at least two of the last five years before you sell it, you won’t have to pay any capital gains tax on the sale as long as the profit on the sale is less than $250,000 if you are single or $500,000 if you are married. You will owe taxes on any depreciation you claimed (or were entitled to claim) after May 1997. For more information, see my article, “
Q: How do you determine on how much to pay yourself each week?
A: If you are a sole proprietor (self-employed), you don’t pay yourself each week. That’s because all the money is yours. See my video for a further explanation:
Q: Tom I am a DBA. Do I need to change that to LLC?
A: These are two different things. A DBA (doing business as) is a business name that you can create for your business. It’s also known as an “assumed name” or a “fictitious business name.” It’s not a requirement to have a DBA. Whether you have a DBA or not, you can set up an LLC if you choose.
Q: What do you think about life insurance? is it investment for future?
A: Life insurance makes sense if you have someone in your life that would suffer financially if you died. This can include your young children, spouse or another person who you currently care for. I don’t recommend purchasing a financial vehicle that combines both life insurance and retirement savings. That’s because the fees associated with such a vehicle are high. If you need life insurance, purchase it separately from a retirement plan.
Q: What’s the best way to keep your receipts?
A: There is no best way. You can put the paper receipts in folders throughout the year, according to the type of expense. You can then save them in a file cabinet or plastic storage boxes for at least three years. Or, you can scan your receipts into a computer and then download them onto a flash drive and save the flash drive for at least three years in a safe deposit box.
Q: What is an IUL?
A: IUL stands for Indexed Universal Life. It’s a type of life insurance that you can borrow against.
Q: I would like to pay my house faster why is that not a good idea?
A: it depends. In general, reducing the amount of interest you pay on your mortgage is a good idea. However, before taking this step you should consider your other financial circumstances. It’s better not to pay off your mortgage faster if you have other debt such as student loans, credit card debt or car loans. It also should be a higher priority to have at least a three-month emergency fund and have established a retirement savings plan. Once you have addressed these other issues, then it does make sense to start paying off your mortgage at a faster rate.
Q: I am 68 and bought a house only 3 years ago. I have been adding significant principal each month because of my age. Should I instead be saving more for retirement? I do have an okay amount so far but can always use more.
A: You should be saving enough for retirement to meet your financial goals in retirement. Once you are on that path, then paying off your mortgage makes sense.
Q: What if your child is under 18, do we pay taxes if our child is working for us?
A: You will not owe Social Security/Medicare taxes when hiring your own child who is under age 18. If your child earns less than $12,950 (2022), he or she will not owe any income taxes. Check with your state workers compensation office to see if you must purchase any workers compensation insurance.
Q: What's the name of your book that contains over 1,000 business deductions?
A: My Family Child Care Record Keeping Guide:
The webinar is sponsored by the Child Care Communications Management Center, which is funded by the Office of Child Care (OCC), Administration for Children and Families (ACF), U.S. Department of Health and Human Services (HHS), and was developed in partnership with the National Center on Early Childhood Quality Assurance, which is funded by OCC, the Office of Head Start, ACF, HHS.
Tom Copeland – www.tomcopelandblog.com
