Ukulele

What I learned at Ukulele Camp that applies to finances

I’m pretty die-hard about DIYing everything I can. Yes, I know there’s a lot of argument that you should pay someone to do things while you’re out earning more per hour at something else, but I don’t buy it entirely. First of all, most of us spend plenty of time scrolling Facebook, binge-watching Netflix, and staring into the refrigerator. None of that is billable time.

There are a lot of projects that just require brute force and minimum skills—I’ll paint my bedroom over a weekend before I pay someone $800 to do it. However, I draw the line at danger (painting the trim on my second floor from a loooong ladder), back-breaking difficulty or heavy hauling (digging post holes and installing a fence), or things that I’m not confident about learning from YouTube (installing a new kitchen faucet and drain).

I’ve had quite a few music lessons over the past, um, decades, so I have been pretty convinced that I could teach myself to play ukulele and guitar from the huge number of books, YouTubes, and online courses available. And, they’ve worked pretty well. Feeling somewhat confident, I went to a few jam sessions at the Old Town School, where I discovered I had miles to go before I cheep. I definitely needed some real-time instruction.

This weekend we trucked up to Midwest Uke Camp in Olivet, Michigan. I came home, not only reinvigorated about playing, but about the place of music in life in general—playing, performing, singing, dancing. With all the grinding away, I had lost sight of the pure joy of it all. And since November, 2016, I think I’ve lost sight of some of the joy available in life. As so many blues masters knew, no one can take music away from you.

But, like everything else I do, I did see some parallels between the very delightful Uke Camp experience and our financial life:

  • When there are a lot of choices, you can’t swoop up everything.

For some time slots, there were 3 or 4 classes I wanted to take. I tried to find out who was a good teacher (all of them!) or offered something particularly appealing. No matter how much you wish, you can’t take more than one—and you probably can’t afford to hook on to every good investment. Go with what you can, given what time and knowledge you have available.

  • It’s not possible to make the optimum choice every time.

There was one class where, maybe, I could have chosen better. The teacher’s style just wasn’t right for me, although his music, omg… But that doesn’t ruin the whole selection, nor the other seven or eight choices I made. Similarly, for every given number of choices (investments) you make, some will not turn out as well as you expect. And some will perform far better—who knew I loved Django Reinhardt gypsy jazz? You have to look at the total experience (performance), incorporate what you learned, and try to do better next time, where you will make mistakes again. Improvement is not perfectly linear, but it should lurch in the right direction.

  • In person makes a difference.

I adore self-study. I can make all kinds of mistakes and make them LOUD, and no one will hear me, except for my dog. When she sees me grab the uke, she immediately asks to go out.

Nevertheless, there’s a lot to be gained from the personal interaction with a good teacher. They can correct subtle mistakes in real time, come up with a trick that solves your individual problem, and there’s the serendipitous addition of techniques and information they just happen to think of that’s not in their books or videos. A good teacher always knows more than they’re putting in print. That’s the chief benefit—the individualization. Sure, you can learn a lot about playing (and financial planning) from a pre-fab program, but at some point, you need it to apply to you, particularly. I think online lessons, websites, asset allocation programs, and all that jazz are great, but everyone has some unique challenges. In fact, if you come to the professional already having a good background, you can probably get more benefit from the one-on-one.

The interaction with other people can often give you new insights and ease your mind about how you compare. It’s oddly comforting to see other people struggling or making and recovering from mistakes. I’d love to see more opportunity for people to be part of investment clubs.

  • Seize the opportunities when offered

The best teachers may not be back. The event probably will not go on forever. It can be hard to find fiduciary, fee-only advice. The crowd was mainly older than 50 and so many said they wished they’d done it, younger. I hear it all the time about financial planning, too. Don’t put it off—neither playing an instrument nor making a financial plan are as difficult as they seem in your imagination.

Ugh! UTMAs and UGMAs

I’m not sure why anyone has these accounts anymore, but they do. I mostly see them during divorces, where one spouse has tried to transfer money to the kids in hopes of keeping it out of the divorce joint property. Technically, these accounts are considered property of the children (not marital), but as with so many other financial issues, it’s largely up to what the attorneys are able to negotiate.

Funding these accounts is a pretty poor idea in most cases, however. What you’re doing is putting all the money in the kid’s name: they’re entitled to it at 18 to do whatever they want with it, and all the earnings are taxed at the parents’ rate. It used to be that as long as earnings stayed below a certain amount, the earnings were taxed at the kid’s rate so it was once a decent strategy to avoid some tax, as long as you could trust your kid not to burn through it by the time they were 18 and two months.

That tax dodge evaporated years ago, but somehow these accounts are still hanging around. Unless you’re trying to shaft your spouse, or have a child actor who’s earned the money themselves but needs some supervision, I don’t think there are many good reasons to have such an account.  They’re considered 100% the property of the child for college financial aid determinations, also.

How can you get the money out of it? The account has to be used for the benefit of the child (once funded, it’s their money), but as long as you can prove that’s how you used it, you’re fine. You’ll have to pay taxes on any gains from the sale of investments, but it’s unlikely the IRS will check up on how the money itself was spent—it’s your kid that could sue you, and hopefully that won’t be a factor.

Once upon a time I had such an account for my daughter, when the taxation was still favorable. I liked it way back then because there was no obligation to spend it on college, and I was certain my brilliant kid would get a full ride scholarship. Ha-ha. Obviously that was before I was a financial planner. We never did accumulate much in college savings in the account, being dunderheads at the time, and I eventually cashed it in to purchase her harp. She hasn’t sued me yet.

Probably the easiest way to clean out the account, besides covering tuition, music lessons, instruments, sports equipment, computers…is to move the money into a 529 plan. If you have significant gains, you’ll have to pay taxes (now playing world’s smallest violin) because 529 deposits have to be in cash. At least the (new) investment will be growing tax free.

If your child has actual earned income, you can also deposit some of the funds into a Roth IRA (up to $5,500/year depending on their earned income). They can withdraw money for college with no early withdrawal penalty, but they will need to pay taxes on any earnings withdrawn. Although they own the account once they’re adults, the tax and withdrawal penalties may slow them up a little. Also, $10,000 can be used as a down payment on a first time home purchase.

For some odd reason, most of these lingering UTMAs are also invested in savings accounts, where they’re earning practically zero for years now. I think they’re just places where people thought they were going to park some cash for college, then mostly forgot about them.  So, if you still have these accounts, resurrect them and put them to work for your kids. College is going to take whatever you can scrape together.

In case you’re wondering what these letters stand for, UTMA is Uniform Transfer to Minors Act and UGMA is Uniform Gift.

Don’t make this mistake with your 401K

It’s no secret that I love Roth IRAs. Don’t tune out because you think you make too much money to have one!

Let me count the ways they’re great:

  • No required minimum distribution at 70 ½, so you can leave the money to grow into old age if you wish.
  • Grows tax free and you pay no taxes on any of it when you withdraw after 59 ½.
  • Can always withdraw your contribution tax free.
  • Can be used for medical emergencies and a $10,000 down payment on a first house (but don’t—leave it alone for retirement!)
  • Your heirs will pay no taxes on withdrawal if any is left
  • And the biggest benefit in my opinion—if you need a lump sum in retirement (dental implant, hearing aid, relocation expenses, buying into a continuous care community), you can withdraw it tax free. If you have to withdraw from a traditional IRA or 401K, you’re going to need to withdraw what you need + taxes on the withdrawal, so much less of your money is preserved going forward.

But, you make too much money, you say? Have you checked whether your 401K at work offers a Roth 401K option? Several clients in the past month have told me they don’t have a Roth 401K because they “make too much money”. It’s true that individual Roth IRAs have an income limit of $189,000 joint and $120,000 single, but the limit DOES NOT APPLY to workplace Roth 401ks. These Roth 401ks have exactly the same limits as your current plain vanilla 401k.

One of the biggest drawbacks of an individual Roth IRA is that you have a limited amount you can contribute each year: $5,500 with $1,000 additional after 50. But this is a relatively small amount, so many Roths never get large enough to fund a retirement. NOT SO with Roth 401ks, where you can deposit $18,500, with $6,000 extra after 50. Note: your employer’s match contribution will still go into the regular 401k.

Roth 401ks were relatively uncommon just a few years ago, but now many employers are offering the choice. It’s much underutilized. Sure, you lose the current tax deduction, but in the future, you should save far more in taxes on the appreciated amount. Check out this chart to see if you’d be better off with a Roth or traditional. In almost every instance, a Roth does better. Special alert to new grads: choose the Roth! Then you’ll never get used to the tax deduction.

If you don’t know if your employer offers it, ask. And agitate for the option if you need to. It shouldn’t cost the employer much extra, if anything. And it will really pay off for you.