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Maximizing Your Wealth: Tips for Managing Extra Money

Learn how to make the most of your surplus cash with expert advice on saving, debt repayment, investments, and retirement planning. Explore strategies to secure your financial future and optimize tax benefits.

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Maximizing Your Wealth: Tips for Managing Extra Money

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  1. What to do with All that Extra Money? Dr. Alex White Dept. of Ag. & Applied Economics 540-231-3132 axwhite@vt.edu http://faculty.agecon.vt.edu/alexwhite/

  2. Uses of “Excess Cash” • Build your savings account • Pay down your debts • Invest in farm/business assets • Invest in yourself/family • Invest for retirement

  3. Build Your Savings • Financial safety net • 2-6 months of living expenses • Housing, food, utilities, medicines, travel, ... • Improves your Current Ratio • Lenders like this! • Emergency funds • No/few income tax implications

  4. Pay Down Your Debts • Start with the high-interest debt • Credit cards, consumer loans • Operating lines • Will reduce life of loan, interest expense • Lowers your tax-deductible interest • Builds equity faster • Adverse income tax implications

  5. Invest in Farm/Business Assets • Productive assets!! • Increase efficiency, profitability • Expand size/scope • Build for future generations • Sizable income tax implications • Depreciation vs Section 179

  6. Invest in Yourself/Family • Reward yourself! • Vacation, new car • Impact on business? • Education for kids (529 plans) • Some tax benefits • Get recharged • Few income tax implications

  7. Invest for Retirement • Aw, Social Security will take care of me • Replaces up to 40% of pre-tax income • Tax-minimizing strategies? • Invest in land, farm assets • Gotta sell them to generate cash • Sizable income tax benefits • Helps in succession planning

  8. Retirement Examples • $10,000 “excess cash” • Option 1 – buy a 4-wheeler • Check fences, cows, haul stuff, etc. • Write off Depreciation Expense (or 179) • Lower your income taxes • Option 2 – invest in retirement plan • Prepare for your “golden years” • Reduce your income taxes

  9. Option 1 – 4-Wheeler • Section 179 • Reduces SE Taxes by $1,400 • Reduces Income Taxes by $1,900 • Total tax savings = $3,300 • Does it increase profitability? • What about next year? • Buy another 4-wheeler?

  10. Option 2 – Retirement Plan • IRA, SEP, SIMPLE, 401(k), etc. • Reduces SE Tax by $0 • Reduces Income Tax by $2,000 • Total tax savings = $2,000 • $1,200 less than Sec 179 option • Account grows tax-deferred • vs dep. of 4-wheeler • Can invest again next year

  11. 10 Years Later • Option 1 • You own 10 4-wheelers • You’ve saved $33,000 in income taxes • Option 2 • You’ve saved $20,000 in taxes • Account is worth $156,500 (8%) • On $100,000 of principal • No taxes on the growth until withdrawal

  12. 30 Years Later • Option 1 • You’ve bought 30 4-wheelers • Saved $99,000 in income taxes • Option 2 • Saved $60,000 in income taxes • Account is worth $1.2 million • On $300,000 principal • After tax, that’s only $890,000 (20% MTB)

  13. Basics of Retirement Plans • “Traditional” Plans vs “Roth” Plans • Traditional • Must have earned income • Contributions are tax deductible • Earnings are not taxed until withdrawal • When in a lower MTB? • Early withdrawal penalty of 10% (age 59 ½) • Required distributions at age 70 ½

  14. Traditional Plans • Traditional IRA • Up to $4,000/year • $1,000 “catch-up” provision if over age 50 • SIMPLE-IRA • Up to $10,000/year • $2,500 catch-up provision • SEP • Up to 25% of salary, $44,000/year max

  15. Roth IRA • Must have earned income • Contributions are NOT tax deductible • $4,000/year + $1,000/year catch-up • Earnings are TAX FREE • Much more flexible • Can get to principal before age 59 ½ • No required distributions

  16. Other Retirement Plans • 401(k), 403(b), 457 • Employer-sponsored plans • Up to $15,000/year + $5,000 catch-up • Same basic rules as Trad-IRA • Roth 401(k) • Same basic rules as Roth IRA • Except for contribution limits

  17. Other “Retirement” Investments • Real Estate • Not liquid • Must sell to realize the gains • Farm Assets • Need to continue farming or sell/lease • Annuities • Wide variety • Not as much income tax benefits

  18. Where to Open a Retirement Account • Banks, credit unions (usually) • Insurance agencies, brokers • Financial planners • On-line • Only if you know what’s going on! • Annual fees? • $25-100/year maintenance fee

  19. What are My Options? • CDs – not good for long-term • Stocks – riskiest, highest return • Bonds – safest, lowest return • Mutual funds – combo of stocks & bonds

  20. How to Invest • Know your risk tolerance!! • Know your time frame • Asset Allocation • Spreading funds between “stocks & bonds” • 100 – Age = % in “stocks” • Remainder in “bonds” (safer inv.) • Reallocate every 3-5 years (or so)

  21. Start Early!! • Age 25-65, $5,000/year • 4%  $494,000 • 8%  $1.4 million • 12%  $4.3 million • Age 55-65, $5,000/year • 4%  $62,400 • 12%  $98,000 • Procrastination kills!

  22. Retirement Planning Worksheet • Excel spreadsheet • Estimate your annual contributions • To meet your retirement goals • Will be posted on website within 2 months • Can e-mail it to you before then

  23. Uh, what if there’s no extra $$? • Pay Yourself First!! • Then, live off the remainder • Build a monthly budget • Save 5-10% of your income (first!) • Build savings account • Pay down high-interest debt • Then invest for retirement • You can always put a few dollars aside!

  24. Bottom Line • Think about how you use your money • Build your savings account • Pay down your high-interest debt • Reward yourself occasionally • Start investing for retirement early! • Save on taxes at the same time! • Helps in transfer of farm

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