Author: David Posner

There are more 1099 contractors in the workforce than ever before and their numbers continue to rise.

The term “1099” comes from a series of IRS documents that are designed to report income received outside of salaried employment. This can include investment returns, tax refunds, and income made as an independent contractor or freelancer.

The first thing to understand is that a 1099 contractor will most likely receive a smaller percentage of her paycheck as “take home” than a W2 employee. One major reason for the difference is that 1099 contractors often have to pay more for medical coverage, while W2 employees are oftentimes covered on their corporate health plan.

Another sizable hit that a 1099 contractor takes on her income comes from the Federal Insurance Contributions Act, or FICA. FICA consists of a payment for Social Security at 12.4 percent and a payment for Medicare at 2.9 percent. A W2 employee splits the cost of FICA with their employer, each paying 6.2 percent for Social Security and 1.45 percent for Medicare. An independent contractor, on the other hand, has to pay both sides of FICA as there is no employer to share the cost. This can really add up. In rough numbers, a person making $75,000 per year would have to pay almost $11,500 as an independent contractor in FICA alone, compared to just under $5,750 as a W2 salaried employee.

Independent contractors can also have a more difficult time saving for retirement. Similar to health insurance, there are advantages to being in a big “pool” when it comes to retirement. The primary disadvantage a 1099 contractor faces is the type of investment vehicles available. Many salaried employees have access to a 401(k) (or a similar retirement savings vehicle) through their company. Many of these plans encourage automatic contributions to be made directly from an individual’s paycheck, and some companies even incentivize those contributions through matching initiatives. Once again, the 1099 contractor has to go at it alone. The good news here is that independent contractors have access to several different types of retirement plans, and there is usually one that is a good fit for just about anyone. That said, the burden of finding a plan, and taking advantage of it once it is set up, lies with the individual.

David Posner is local investment executive specializing in utilizing socially responsible options for long-term financial goals.

The words “back to school” don’t mean the same thing for everyone—it’s not all sharpened pencils and shiny red apples for the teacher. For many, it means scraping together tuition for college. But, school is a time for personal development (and not financial anxiety), which is where Virginia’s 529 plan comes into play.

Named after section 529 of the Internal Revenue Code, the 529 Savings Plan is designed to help families save for future educational expenses. They can be used to help pay for qualified educational expenses in any state and even at a large number of foreign schools. In Virginia, the two most popular options are: the direct-sold Invest529 and the advisor-sold College America. It is important to note that these are just two options out of many, and they might not be the best for everyone.

The first thing to understand about a 529 plan is that, if used properly, it offers substantial tax advantages. Every state’s 529 offers tax-free investment growth and tax-free distributions, as long as the money is spent on qualified educational expenses. For tax purposes, a contribution to a 529 is seen as a gift, and as such, it is currently capped at $15,000 per person, per year for 2018, before eating into an individual’s lifetime exclusion. However, there is a first-time catchup allowed, equal to an additional five years’ worth of gifts. In other words, an individual can contribute a one-time maximum of $75,000 in 2018 to carry forward for five years.

Virginia residents get the added bonus of a $4,000 unlimited, carry-forward, annual state tax deduction. For example, if you funded a 529 with $40,000 today, you could deduct $4,000 per year from your Virginia state taxes for the next 10 years. Those age 70 and over have the added benefit of being able to deduct the entire amount contributed to a Virginia529 account in a year.

Let’s say that the account is worth $80,000 in 18 years. As long as the money is spent on qualified educational expenses, there would be no taxes owed on the $40,000 of growth.

The last component of a 529 plan is the investment choices. Both the Invest529 and College America plans offer a wide array of well-diversified options. College America is a partnership between the state of Virginia and investment company American Funds. An investor is limited to that fund family if they choose that plan. Invest529, on the other hand, utilizes several different fund families to create strategically allocated portfolios from which an investor can choose.

One more piece of advice: There are several ways for a person to support themselves in college. From loans to jobs, it can be done. There are no such support options for retirement, and Social Security is typically not enough for a person to live happily on. In other words, deciding where to allocate savings is a decision with long-lasting consequences. 

David Posner is local investment executive specializing in utilizing socially responsible options for long-term financial goals.

Spring is traditionally a time of year when the real estate market begins to heat up and people look to move homes. In the Charlottesville area, we have the benefit of a robust economy, stunning natural resources and excellent entertainment. But with our high quality of life comes our seemingly ever-increasing cost of housing.

According to the 2017 Nest Realty Annual Market Report, housing prices in the Charlottesville area have risen each of the last five years to a median value of $295,000 and an average price of $369,551 for 2017. That is compared to a median price of $275,000 and average of $341,534 for 2016. With costs rising across the area, could it actually make more sense to rent, rather than buy? Some argue that renting is tantamount to throwing money away. Others point out that renting a home and investing in other assets, such as stocks, is a more lucrative alternative, with greater liquidity and very little overhead requirements.

Ultimately, the answer to the question of whether to rent or buy a home depends on the needs and circumstances of an individual, or family, and several other complex factors: your level of current retirement savings, how long you intend to own or rent the home and the stability of your job and lifestyle. But, there are other important things to consider.

One oversight people make when deciding if they should rent or purchase a home is in understanding the structure of a mortgage payment. The biggest misunderstanding: Much of the overall interest on a mortgage is paid in the beginning of the contract.

Using the average Charlottesville-area sales price of $369,551, let’s look at the numbers. With a 10 percent down payment and a 4.5 percent annual interest rate for a 30-year loan, the mortgage would cost $1,685.21 per month. No shock there, but dig a little deeper to learn that, for nearly the first 10 years, over $1,000 per month is going directly to interest. For the first month one would pay $1,247.23 in interest and $437.98 in principal. After three years you would still be looking at $1,184.06 in interest and only $501.16 in principal payment. It then takes until November 2032 (more than a decade!) for the value of the equity payments to exceed the interest payments. Including taxes, insurance, closing costs and the other expenses associated with real estate (such as repairs and maintenance), these timelines greatly extend. All this is to say that the ideas of renting as a way of “throwing money away” and buying as “a way to build equity” are both drastic understatements.

David Posner is local investment executive specializing in utilizing socially responsible options for long-term financial goals.