UTMA and UGMA are very similar. Both are uniform code proposals adopted by the individual states. Like other uniform codes (the uniform building code is a common one, for example) these work by proposing a common framework for states to use in order to prevent a hard to use patchwork of laws in each state.

The uniform code did not prevent one important variation. The UTMA or UGMA account comes under the control of the beneficiary when he reaches the age of maturity. However, that age varies from state to state. Typically, the beneficiary assumes control of the UGMA or UTMA at age 18 or 21.

The UTMA and UGMA are two different uniform codes, but they are more alike than they are different.

UTMA is the Uniform Transfer to Minors Act. People say, "ut-mah" when they talk about them.

UGMA is the Uniform Gifts to Minors Act. People say "ug-mah" when they talk about these.

Both UTMA and UGMA were created to allow adults, usually parents, to transfer assets to minors without the need to establish a special trust to enable such ownership. Both UTMA and UGMA accounts rely on a custodian to manage the assets in the account on behalf of a minor beneficiary.

Funding UTMA and UGMA accounts

Contributions into a UTMA or UGMA are irrevocable transfers. That means that once the gift is made, it cannot be revoked. There is no way for the donor to change their mind and demand their assets back. This is important because such transfers are considered completed gifts and thus are not considered assets in the estate when the donor dies.

It also means that all assets inside of a UTMA or UGMA are considered assets of the student for purposes of financial aid. Since students are expected to contribute a greater percentage of their assets than parents, a large UTMA or UGMA may reduce the amount of financial aid the student qualifies for.

Difference Between UGMA and UTMA

The main difference between an UTMA and UGMA is what kind of assets they can hold. Assets within an UGMA are limited to bank deposits, stocks, bonds, mutual funds, and other securities and insurance policies.

UTMAs allow almost any kind of asset, including real estate to be given to the minor. All the states except for Vermont and South Carolina have adopted UTMA law.

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What Is The Difference Between UTMA and UGMA? originally published at Personal Finance Blog - FinanceGourmet.com

Financial advisors and other financial professionals throw around certain terms like everyone already knows what they mean. In some cases, they are right, and in other cases, most people only have a partial grasp on what exactly a certain financial term means. In many cases, knowing the full definition of a word or phrase makes all the difference.

What Does Pre-Tax Mean?

Pre-tax dollars is a phrase that is often used in conjunction with retirement planning and 401k contributions. In fact, one of the benefits of a 401k plan is that contributions are made with pre-tax dollars. But, what is the definition of pre-tax dollars, anyway?

When an employee gets paid, there are numerous deductions that get taken out of their paycheck. These payroll deductions range from income tax withholding to FICA taxes to voluntary contributions for things like health insurance or cafeteria plans (Section 125 plans).

Some of the deductions from your paycheck, like federal tax withholding, are computed based on how much you are paid. Pre-tax means that the deduction occurs before that withholding is calculated. This is why many financial writers and other financial experts point out that contributing to your 401k plan doesn’t actually reduce your paycheck by the full amount.

It is worth noting that both Medicare taxes and Social Security taxes are not reduced by pre-tax contributions to your 401k. That is why there is separate entry for FICA Wages or Social Security Wages on your paystub or W2 Form.

How Pre-Tax Contributions Affect Your Taxes

The impact of pre-tax contributions on your taxes goes beyond just how it changes calculations on your paycheck. Pre-tax 401k deferrals are also not included in the taxable wages reported on Form W-2.

W-2 wages are used as the starting point for calculating your Adjusted Gross Income and Modified Adjusted Gross Income (MAGI). These two numbers form the basis of your taxable income. Just as importantly, these numbers also determine your eligibility for numerous tax deductions and tax credits, as well eligibility for tax items with income limits.

For example, contributing to your 401k reduces the your income for purposes of determining whether an IRA contribution is deductible or whether you meet the income limits for Roth IRA contributions.  It also can affect which tax bracket you are in. Contribute enough to your 401k to drop your income under the bottom of the tax bracket and you’ll pay taxes in the lower bracket only.

401k Contributions and Advanced Tax Planning

Unlike IRA contributions which can be made until April 15th of the following tax year, 401k contributions have to be during the tax year (before December 31st). 401k contributions also have to be made via salary withholding which means you can’t just write a $10,000 check at the end of the year to bump up your 401k contributions to the right level.

In order to specifically target an income level or total wages, you’ll need some advance tax planning. Calculate the ballpark withholding you think you’ll need at the beginning of the year and notify your employer. Then, over the course of the year monitor your 401k withholding and wages to see if they are tracking to the target you have. Adjust your 401k contributions during the summer and again in October. That means only subtle shifts should be necessary (if at all) in the last couple months of the year.

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What Are Pre-Tax Dollars? originally published at Personal Finance Blog - FinanceGourmet.com

As a financial planner, lots of people come to see me looking for help with their budget. Most of the conversations go pretty much the same. “We don’t do a lot of extravagant things or buy a lot of stuff, but we just don’t seem to have any money to save.”

I usually start by asking “What are your car payments?” For people who don’t have any other obvious issues, car payments can often be the answer.

The sneaky thing about car payments is that no matter what budgeting concept you use, they hide away. Some people will tell you to list your fixed expenses versus your discretionary (non-fixed) expenses. There are the car payments hiding under the fixed column. Other budgeting styles have you list your needs versus your wants. Again, there are the cars tucked under the “needs” heading. So while you stare vainly at the discretionary spending or at your wants spending, the problem lurks on the other side.

My Car Isn’t Expensive

Right now, you are thinking, “I don’t drive that expensive of a car.”

Ever notice how many car commercials there are on television? Whether you are watching the Super Bowl or the Oscars, Grey’s Anatomy, Deal or No Deal, American Idol, or House, you will see dozens of car commercials. As you watch those commercials you can get a very skewed idea of what is a “normal” or “average” car.

Take a couple earning $100,000 per year. They are doing pretty well right? It’s $8333 a month. Figure that works out to a take home pay of around $6000 after taxes and insurance premiums and so on. Let’s say they are a savvy couple and they were smart when buying a house. A $2,500 mortgage wouldn’t be any sort of a stretch. That leaves them $3,500 a month to live on. Not bad right?

Now let’s say that he has a car payment of $550 a month and she has a car payment of $450 a month. How about now? They have $2,500 a month to live on now. Car insurance, cell phones, internet, gas, groceries, utilities, ice skating lessons, band camp, day care… and all of the sudden a couple making six-figures has no money.

The hard part of this conversation is that neither one drives an “expensive” car.

A car that cost just $30,000 with a 5-year loan at 7% works out to almost $600 a month for a car payment. That’s not a Lexus! That’s a regular Honda or Ford or whatever.

A $500 a month car payment works out to $6,000 a year. For the couple above, that $500 payment represents 6% of their total income and that’s just for one car — PRE-TAX! If the the couple pays $20,000 in total state and federal taxes (a ballpark figure) then that payment actually represents 7.5% of their disposable income. Don’t forget, a couple usually needs two cars, so two $500 car payments eat up 15% of their annual income. Is it any wonder their budget seems tough to figure out?

How Much Is Too Much?

Loan guidelines suggest that a house payment should not exceed 30% of take-home pay. If a house is supposed to cost 30% how much should a car cost? Half as much? A quarter as much? Realistically, somewhere in the neighborhood of 10% would be a solid limit. Our couple above has $6,000 in take home income, so their total car payments should be under $600 total. Anything higher means plenty of head scratching come budget time. So, two $300 payments, or one $600 payment. If you want nicer cars, buy them less often. If you want newer cars, buy lower priced ones. Don’t even think about going over 20% unless you want to be worried about money every month.

Protect Your Budget

So, how do you keep from falling into this trap? If you like the car, go online to a neutral site like MSN or Edmunds and get a price. Don’t pretend you are going to get some super-low negotiated amazing price deal. Just go with the regular MSRP for now. Take the price and plug it into a loan calculator at 7%. See what the monthly payment is. Too high? Then it is probably time to find a different car to buy.

Another option is to buy used. A new car loses up to 20% of its value in the first year alone. Look for a used one-year old model or a two-year old model. A good bank or credit union will still give you a 5 year loan at the same interest rate (or within 0.25%) of the new car rate. If the lender offers you any other deal, go somewhere else. There is no reason you can’t get a 5 year loan at about the same rate on a 1 or 2 year old car. This will help keep your payment a little lower.

If you are within striking distance of paying off one or both of your car loans, do it, and then keep that car. Don’t buy another one, used or new. See how much more room there is in your budget when you don’t have a $500 car payment. If you get both cars paid off you’ll have $1000 more every month!

Upside Down

When you owe more money than the car is worth, it’s called being “upside down” in your loan. Don’t fall for the trick of getting out of your loan by buying a new car. All that happens is that your old negative balance gets rolled up into your new loan making your payment even higher, and guaranteeing that you will be upside down for even longer in your new car. For example, if you have 3 year old car, your car is probably worth less than you owe because the value of the car drops so fast the first couple of years. The car you bought for $25,000 is worth $18,000 but you’ve only paid off $4,000. So, you are upside down to the tune of $3,000. When you buy a new car for $30,000 your loan will be for $33,000. One year later your $30,000 car will be worth $26,000 and you’ll be upside down almost $7,000! It is a vicious cycle that too many people get caught up in.

Good luck. Your budget will thank you.

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Budget Issues? It Might Be Your Car originally published at Personal Finance Blog - FinanceGourmet.com

Listen to the book authors, newspaper and magazine columnists and many web sites, and you will hear that [tag]financial advisors[/tag] or [tag]financial planners[/tag] are nothing more than glorified snake oil salesmen out to separate you from your hard earned money.

To listen to some in the finance industry and their champions, financial advisors and financial planners are bastions of righteousness steeped in knowledge about financial concepts so complex that no mere mortal could possibly hope to navigate the waters alone.

The truth of course lies in between. In real life, many financial decisions are frighteningly complex and unlike other decisions you may face many of them are irreversible once a mistake has been made. More importantly, some of the biggest financial issues, like retirement, take years to accomplish, and you get one chance. If you try the latest fad diet for a couple of months only to find out it doesn’t work for you, you start over a little wiser and with a little more experience. You could diet hundreds of times in your life. You could talk to friends and family, each of whom has hundreds of times of experience to share with you.

Retirement is a little bit different. You will only retire once (you hope). If you don’t get it right, you can’t start over. Most of your friends and family have never retired either. Those that have may have used techniques that are no longer available to you (generous company pension.)

This is where a good knowledgeable financial advisor or financial planner comes in. Over the course of a long career, he or she will have helped hundreds of people retire. They’ll see what works and what doesn’t. They’ll see what causes people to stumble and where the errors are made along the way, and they’ll guide you through.

Of course the key is “good knowledgeable” financial advisor. Unfortunately, there are way too many financial advisors and financial planners out there who are missing one or both of those key words. This primer is meant to give you some background into just exactly what a financial planner or financial advisor is. (For example, an explanation of what the difference is between those two terms as well as how they differ from a broker, financial representative, etc…)

Check out the Financial Advisors Primer

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1. Part 4 and Part 5 of Financial Advisor and Financial Planner Primer is up!
2. Do You Need a Financial Planner or Financial Advisor?

Financial Planners and Financial Advisors an Introduction originally published at Personal Finance Blog - FinanceGourmet.com

Part 4 and Part 5 of the Primer about [tag]Financial Advisors[/tag] and [tag]Financial Planners[/tag] is now up. Find out about what certifications you need to understand, and why they matter. Don’t worry, it’s a way shorter list than you might think.

Also, keep an eye out for TONS of new content once I get a chance to do final edits this weekend.

Here is a sneak preview:

• Why You Need at Least TWO Credit Cards for a Good [tag]Credit Score[/tag]
• How to Choose A Financial Advisor- Finally the Details to All Those One Line Requirements You’ve Read Before
• Financial Advisor vs. Financial Planner – More Than Po-ta-to Po-tah-to
• The [tag]Stock Market[/tag] – It’s Is DUMBER Than You Think
• And More…

Related posts:

1. Do You Need a Financial Planner or Financial Advisor?
2. Find the right financial advisor (in under 200 words)

Part 4 and Part 5 of Financial Advisor and Financial Planner Primer is up! originally published at Personal Finance Blog - FinanceGourmet.com