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In 1974, the federal government approved a bill that created a new type of financial savings account, known as an Individual Retirement Account to encourage people to save for retirement. Today these initial IRAs are known as traditional IRAs and can be opened at banks, credit unions, investment firms and other financial institutions. These firms are known as custodians.

Individuals can lower their taxable income by putting money into traditional IRAs every year. These funds earn ongoing interest and generate income but IRA owners can delay paying any income tax on their annual deposits or earned money until they turn 70½ years of age. For many people, their age 70½ tax bracket is much lower than when the money was earned resulting in lower taxes when the money is withdrawn. At that point, they must begin withdrawing a portion of the money each year. These funds are considered income and are taxable. If for some reason a person chooses to withdraw money at an earlier age, a penalty is assessed by the Internal Revenue Service.

“Traditional IRAs include a wide range of investment opportunities, including stocks, bonds, mutual funds, annuities, unit investment trusts and exchange-traded funds,” said Mark Dunsmoor, senior vice president of Legacy Bank. “As companies started eliminating pension benefits, IRAs helped the average person invest in these products with tax savings to better prepare them for their future.”

To help those closer to retirement, allocation amounts are increased based on age. “If you are under 50, you can deposit up to $6,000 yearly into a traditional IRA as of 2019,” said Dunsmoor. “If you are over 50, you may deposit up to $7,000.”

“Since 1974, changing regulations have morphed IRAs into several different types of investment accounts, however the logic remains the same for each; save money for retirement while reducing your taxes,” said Dunsmoor. “Yet, all IRA accounts do not utilize the same tax advantages. The Roth IRA is a great example.”

Individuals can deposit funds into a Roth IRA and pay income taxes upfront on the initial investment. However, later when the owner withdraws those funds, no further taxes are paid on the financial growth.

“Roth account owners who withdraw after 59½ years of age and whose accounts have been open for five years or more pay no taxes on any funds withdrawn. Equally important, you are not required to start withdrawals at 70½ as with a traditional IRA,” said Dunsmoor. “Roth IRA’s appeal to people who believe their tax rates at retirement age will actually be higher than when they opened the Roth IRA.”

In 2019, the annual contribution levels for a traditional IRA and the Roth IRA are the same. Roth contributions however, are limited to the extent of your income versus the $6,000 to $7,000 for a traditional IRA. For example, if you earned $4,000 in income that is the most you can contribute. The IRS also places restrictions on high income earners using a formula known as modified adjusted gross income and tax-filing status.

Mark Dunsmoor is the senior vice president of Legacy Bank and has 40 years of banking expertise. He has been recognized by Greater Pueblo Chamber of Commerce which presented him with the Charles W. Crews Business Leader of the Year.

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A recent U.S. Small Business Administration report found that only about half of all small businesses survive five years. This is not necessarily because they provided inferior products or services. It is more often due to poor financial management. To document this point, a recent survey of some 2,000 owners of failed businesses in the U.S. and UK by Xero, a provider of cloud-based accounting software, claimed 65 percent of all unsuccessful business owners blamed financial mismanagement as their reason for failure. They weren’t referring to criminal activities, but rather acknowledging not knowing where their money came from and went to.

“A small or mid-sized firm can easily address this fault by implementing an accounting system that consistently delivers a complete picture of its financial condition as a basis for business decisions,” explained Mitch Brown, president of Legacy Bank’s Pueblo West branch. “That process results in three documents being created monthly, quarterly or annually; an income statement, a cash flow statement and a balance sheet.”

The more frequently these reports are compiled, the clearer the picture of a firm’s financial condition. Most accounting software programs make it easy for a business to create its own financial documents. However, the assistance of an accounting or financial professional is a wise consideration notes Brown.

For example, if a company is seeking outside financing, professionally prepared financial statements are considered more reliable than those generated by the company itself. In any case, the company must still compile the fundamental financial information used to prepare these financial statements.

“The most important of these documents is the balance sheet which is a rolling twelve-month projection of a business’s financial situation,” Brown added. “It provides a real-time, ongoing picture of a company’s ability to pay its debts on time and meet its long-term expenses, expansion plans, and growth goals.”

This is critical decision making data for owners and management, but it is equally important to lenders, partners, suppliers, potential investors and others with which the company may have longstanding business relationships. “If an owner decides to sell the business, the balance sheet can be used to help establish its baseline value,” said Brown.

For some business owners, the task of compiling and maintaining all of the data used to prepare financial reports while still running the company may seem intimidating. Fortunately, an Internet search provides scores of articles, videos and reports to show it can be done by the company or with outside help.

“It’s far better to learn how to prepare and use financial reports than to fail to do so and have the business fail as a result,” comments Brown.

Mitch Brown is the branch president of Legacy Bank Pueblo West and has over 16 years in banking and finance. Brown holds a master’s degree in business administration and is an active part of the Pueblo West community. His involvement includes Rotary Club Pueblo West and YoungLife among others.

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As the COVID-19 business restrictions are lifted, many companies that were closed, as well as those essential businesses which remained open, will be looking for more efficient ways to do business. Better management when it comes to handling day-to-day banking needs is likely one process that might be examined. Remote deposit capture and merchant service systems may be worth considering.

A survey done prior to the COVID-19 situation revealed that two-thirds of small-to-mid-sized businesses made branch bank deposits weekly and one-third visited their bank’s branch office daily. These visits are primarily driven by the need to have timely access to the funds available from customer’s checks. When non-essential firms reopen, they may have fewer employees. That means that “sending someone to the bank” may not be practical. These companies, as well as those that have been operating as essential, will hopefully find themselves with significantly increased business as customers return from the COVID-19 hiatus, resulting in the need to find more efficient banking

The replacement for trips to the bank may well be a technology-based deposit process known as Remote Deposit Capture (RDC). In 2013, Congress passed the Check 21 Act allowing banks to clear checks after receiving visual images of them. This enabled interbank check clearing by allowing banks to electronically exchange check images and benefitted companies that regularly receive a large number of checks. Over time, the combination of lower-priced equipment and improved internet technology began to make RDC affordable for small businesses.

A company’s bank can help it implement an RDC system according to Rebecca Diaz, branch vice president of Legacy Bank. “All that is needed is a computer, an internet connection and a check scanner which many banks will install for their customers. An employee can scan each check received. The digital image is transmitted to the bank over the Internet which accepts the visual image of the check and deposits it to the firm’s account.”

During the COVID-19 closedown, many people and businesses found themselves purchasing goods and services at retail stores with a credit or debit card rather than cash, which is more difficult to obtain when confined to your home. As more businesses in multiple categories begin to reopen, it is anticipated that customer traffic and online purchase volumes will increase while customer’s reliance on credit and debit cards will continue. “This may lead more businesses to consider implementing merchant services technology to accept those payments,” says Diaz. Only three things are required: a credit card merchant account, a bank account and a way to process payments.”

To implement merchant services, any business that wishes to accept credit or debit card payments can purchase or lease a processing terminal from their bank that connects to a telephone line or to an internet connection. The customer swipes their credit or debit card or an employee manually enters the card information into the terminal. The data is then sent to the issuing bank to be verified and approved. The terminal prints copies of the receipt for the business to keep and for the customer to sign, unless they have opted for paperless transactions. After a given period of time--a few hours or a few days--the merchant will close the batch of sales by electronically sending it to the bank. Then, in one to two business days, the funds will transfer directly into the merchant’s bank account.

There are other aspects to establishing a merchant services account, such as providing the bank with the firm’s business and financial information. There are also costs involved. The bank being considered can provide the information it requires to set up a merchant services account for your business.

This article is a part of the Forward Thinking Education Series presented by Legacy Bank, the Latino Chamber of Commerce and the Pueblo Chieftain. Webinars further discussing this and other financial topics can be found on the Latino Chamber of Commerce Facebook page at: https://m.facebook.com/PuebloLCC/

Rebecca Diaz is a branch vice president for Legacy Bank. Diaz was top of her class at the Graduate School of Banking at Colorado and has been recognized as the Latino Chamber’s 40 Under 40 award recipient. An avid Pueblo County volunteer, she has spent 12-years primarily in community banking advocating for local businesses and residents.

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Reverse Mortgages were created in 1961 to allow qualified homeowners to convert their home equity into cash without selling their home or taking out a home equity loan. Historically, reverse mortgages have allowed people to generate funds to cover a wide variety of living expenses without tapping retirement or savings accounts.

In the few short months since the arrival of the COVID-19 pandemic, many people have had their income reduced or halted, watched the value of their retirement plans deteriorate and are being advised to build up, not tap their savings account. According to Fidelity, the average 401(k) and IRA was down 19% and 14%, respectively, by the end of the first quarter of 2020. The recently enacted CARES Act allows some people affected by the COVID-19 crisis to borrow up to $100,000 from their 401(k) plans and to withdraw money they have contributed without paying a tax penalty. However, these funds will have to be repaid and income taxes will still be owed on withdrawn money.

Given these circumstances, qualified individuals who have a significant amount of equity in their homes may find Reverse Mortgages as a viable source of funds.

Rebecca Diaz, Branch Vice President of Legacy Bank explains who qualifies for a Reverse Mortgage. “To qualify, an individual must be at least 62 years of age. They must either own a house, condo or townhouse free and clear or have at least 50 percent equity in their home. The equity is based on current market value, not what the owner paid for the property. Depending on the lender’s loan policy, a manufactured home built on or after June 15, 1976, may also qualify. You can also utilize a reverse mortgage for the purchase of a new property, as long as you are a qualified Reverse Mortgage borrower and a sufficient amount of cash is available for the down payment.”

The lender providing the reverse mortgage lends the home owner an amount equal to their equity. These funds can be received by the borrower as a single lump sum, a fixed monthly payment for a certain period of time, a lesser fixed monthly payment for the life of the loan, or a line of credit. There can also be a combination of different advance structures. Speak with your lender to find the best fit for you. These funds aren’t taxable as the IRS considers the money to be a loan advance. Interest accrues on the funds advanced. That interest is rolled into the outstanding loan balance which means that there is no monthly payment due from the homeowner.

“There are fees involved,” notes Diaz, “including a lump sum for mortgage insurance, loan origination and servicing fees like appraisal, title search and insurance, inspections, recording fees, etc. Most lenders will allow borrowers to finance these costs into the loan when sufficient equity is available.”

A homeowner with a reverse mortgage is required to pay property taxes, maintenance and property insurance. Standard Reverse Mortgage loans do not utilize an escrow account. A Reverse Mortgage cannot be in a second lien position. If there is an existing traditional mortgage and/or a Home Equity Loan already in place, those loans must be paid off with cash or with proceeds from the Reverse Mortgage. At least one of the borrowers must live in the home for a minimum of six months of every year in order for the home to be considered their primary residence. Eventually, when the homeowner moves or dies, the home is sold. The proceeds go to the lender to repay the Reverse Mortgage’s principal, interest, mortgage insurance, and fees. Any additional funds from the sale go to the home owner, if still living, or to their estate. In some cases, heirs may choose to pay off the mortgage and keep the home.

If the home is owned by a married couple and both hold title to it, both can be classified as borrowers. Should one spouse die, the other can continue to have access to the Reverse Mortgage proceeds and live in the house. If only one spouse has the title to the home, both must consent to the loan though the other spouse will not be an actual borrower. If the surviving spouse wants to keep the home, he or she will have to repay the loan through other means.

“There are several types of Reverse Mortgages structures and a lender can review them with an interested home owner. While they were never conceived as a financial tool for a pandemic, they may be a viable option for many people today,” Diaz concludes.

Rebecca Diaz is the Vice President and leader of Regency Business Development for Legacy Bank. Mrs. Diaz was top of her class at the Graduate School of Banking at Colorado and has been recognized as the Latino Chamber’s 40 Under 40 award recipient. An avid Pueblo County volunteer, she has spent 12-years primarily in community banking advocating for local businesses and residents.

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