How to Avoid Borrowing From Your Retirement Plan

January 26, 2017

Have you ever borrowed from your employer’s retirement plan? When you need cash in a hurry, it can be tempting. After all, you don’t have to worry about a credit check and the interest just goes back into your own account.

However, there are a couple of reasons why this may not be the best idea. First, you lose any gains your money would have earned. Keep in mind that the stock market averages a 7-10% return per year, including many years with double digit returns so you could be losing out on real money.

Second, if you leave your job before paying off your loan, the outstanding balance could be considered a withdrawal and subject to taxes plus a possible 10% penalty if you’re under age 59 ½. These losses could end up jeopardizing your retirement. Here are some ways to avoid having to raid your retirement nest egg in the future:

Don’t think of your retirement account as a giant ATM. Even if your plan allows it for any reason, retirement plan loans should only be for dire emergencies and no, wanting the latest tech gadget or a vacation doesn’t qualify. Instead, calculate how much you need to save each month and have that amount automatically transferred to a separate savings account until you have enough to purchase what you want. Don’t have enough to save? Ask yourself what expenses you’re willing to cut back on to make your goal happen.

Have an emergency fund. Even if you do have an emergency, a retirement plan loan shouldn’t be your first resort. If your investments are down in value, you may not even have enough to borrow. Instead, build up enough savings to cover 3-6 months’ worth of necessary expenses and keep that money someplace safe like a savings account or money market fund. If you can’t stand the idea of all that cash just sitting there earning less than 1%, here are some ideas to put it to work harder for you.

Consider other options. For example, the average home equity interest rate is about 5%. Don’t forget that it’s tax-deductible too. If you’re in the 25% tax bracket, that loan may only cost you 3.75% after taxes, which is less than your investments will probably earn. Just be aware that your home is on the line if you can’t make the payments so this is probably not be a good idea if you’re facing severe financial hardship.

One final point is that people sometimes use a retirement plan loan to pay down credit card debt. Given how high credit card interest rates can be, this might be a smart move if it’s part of a larger plan to become free of high-interest debt. However, if you end up filing for bankruptcy, you’ll still have the retirement plan loan. In that case, you would have been better off using the bankruptcy to wipe out the credit card debt and leave your retirement account alone. (It’s generally a protected asset in bankruptcy.)

Retirement plan loans have a place, but be aware of the downsides. If you’re not sure what to do, consider consulting with a qualified financial planner. As with any financial decision, you want to make an informed one.

 

 

 

 

How to Avoid Taxes on a Home Sale

January 20, 2017

Someone recently asked me if they were going to have to pay taxes on the sale of their home. They were downsizing out of a big house and were going to move into the “in-law quarters” of one of their children’s homes. This person was absolutely 100% convinced that he was going to have to pay taxes on the gains from the sale of his house since he wasn’t “rolling the gains” into a bigger house.

When I told him what the tax code says about capitals gains tax, he told me I was wrong. So with him in the office, I called a friend (on speaker) who is a CPA and asked what the tax implications were for selling a home. The CPA said exactly what I said, without prompting, and the soon-to-be-seller was still dubious.

So what is the real story on how the gains from selling a home are treated? According to IRS Topic Guide 701, you can exclude up to $250,000 (single) or $500,000 (married) of gains from the sale of your house IF it has been your primary residence for 2 out of the last 5 years. That’s it. It’s that simple.

There is no rule today about what you have to do with the proceeds. There were things like that in the tax code in the past, but the tax code is an ever-evolving entity. The biggest test is the 2 out of 5 years, which is very easy for most home sellers. IF the house has been your primary residence for the last 2 years, you’ve got a $250,000 or $500,000 tax-free gain.

If you’re married and your home has appreciated by $600,000, CONGRATULATIONS!!! The tax on the sale of your home will be $600,000 (gain) – $500,000 (exclusion) = $100,000 (taxable gain) * 15% (capital gains rate) for a $15,000 tax upon sale. You can buy a house, watch it go up in value by $600,000 and only pay $15,000 in taxes!  The tough part is finding a house that goes up in value by $600,000!

Here’s how you could possibly use this piece of the tax code creatively and to your advantage in a time when housing prices are rising. It’s a hypothetical situation and I can’t imagine anyone really doing this, but it illustrates the tax code’s interesting nature. You’d have to live as a bit of a minimalist to make this work. Moving a bunch of “stuff” can be time consuming and expensive, so the less you have to transport from one place to the next, the easier this is.  This only works if your home value increases regularly……

Step 1 – Buy a house.

Step 2 – Live in it for 2 years.

Step 3 – Buy a second house, move into it and rent out house #1.

Step 4 – Live in house #2 for 2 years and buy house #3, renting out houses #1 & #2.

Step 5 – Sell house #1 by the end of year 5 and the gains are tax-free since it was your home in years 1 and 2.  You could sell house #2 as well and pocket the tax-free gains.

With this example, you can see that if you’re willing to move A LOT and housing prices rise quickly, you could potentially never pay taxes on the gain from the sale of a house. In the real world, though, the IRS code allows most of us to sell a home with zero or a very small capital gains tax in comparison to our overall gain. Fortunately, for the dubious person in the meeting recently, he used his own laptop, went to www.irs.gov and was able to find that my answer was indeed factually correct. By the time the meeting ended, he was a surprised and happy home seller.

 

 

How to Budget for Child Care

January 17, 2017

tania-pic

I was flipping through old pictures of my children and came across the one above. My daughter, now 7, was about 10 months old in this picture. My friend needed a baby for a photo shoot and I volunteered my daughter if I could get copies of the photos. This picture is one of my favorites.

As I think back to when she was a baby, I can’t help but think of how expensive that time in our lives was. In fact, I used to call her my little mortgage payment. With the average cost of childcare for an infant easily exceeding  $10,000 a year, many parents struggle to budget for it. The following strategies can help take the financial bite out of child care:

1. Create a budget to see exactly how much you can spend on child care. Look for items you can cut back on such as cable, eating out or entertainment.

2. Once you have created your budget, decide how much you can reasonable afford for child care. Contact your employer to see if they offer a child care search services. Research childcare options that meet your budget. A private nanny may be out, but a quality daycare facility may fit into your budget. A friend of mine did her budget and realized that it was cheaper for her to stay home rather than put her children in daycare.

3. Once you have narrowed potential childcare providers, ask about discounts. You may be able to get an employee discount or a discount based on where you live or if you have multiple children attending the same daycare. If your income is limited, contact your child care provider or your state’s Child Care Program Office about financial assistance.

4. Consider using employer savings plans like a dependent care FSA to save money for daycare pre-tax or claiming a dependent care tax credit on your taxes. Since you can’t use both on the same expense, weigh your options to see which one is better. In general, a dependent care FSA is better for higher income earners (above the 15% tax bracket) and the dependent care tax credit is better for lower income wage earners.

Don’t let yourself get overwhelmed by the cost of daycare. With a little bit of planning, childcare does not have to bust your budget. A little bit of research can go a long way to helping you find the best childcare option for your needs.

What To Do After a Spouse Passes Away

January 12, 2017

One of the most difficult experiences to live through is the death of your spouse. In addition to dealing with grief, there are a host of financial and legal matters to attend to. To help relieve the stress during an already difficult time, here is a checklist of items to take care of:

Get an inventory of assets, debts, insurance policies and bills. This is particularly important (and challenging) if your spouse primarily handled financial affairs. You can use this Financial Organizer to record the information.

Request a copy of your spouse’s credit reports from each bureau so you can see all the debts owed. (You can get free credit reports every 12 months at annualcreditreport.com.) Don’t forget to contact their former employers for accrued but unpaid salary, bonuses, and vacation/sick pay, pension survivor benefits, and life insurance policies. You should also see if they had any life insurance through their credit cards any any lost policies here. Finally, you’ll want to ask the funeral director for at least one copy of the death certificate for each account, life insurance policy, any real estate property with their name on it.

Close or re-title accounts. Here is a breakdown of how to deal with various types of assets:

  • Annuities and life insurance policies: After presenting the insurance company with a death certificate, the death benefits (which may be different from the cash values) will be paid out to the designated beneficiaries.
  • Assets solely in the spouse’s name: These will have to go through the probate process and will pass on to the person designated in the will or if it’s not in a will, according to state law.
  • Assets jointly owned with rights of survivorship: These assets will pass to the joint owner(s) when you present the bank, investment company, or county records office and mortgage company (in the case of real estate) with a death certificate. If there’s a mortgage on the real estate, you may want to wait until the other affairs are settled since there’s a risk of the mortgage being called.
  • Assets with a beneficiary (living trust accounts, qualified retirement plans, 529 plans, HSAs, bank accounts with “payable on death” registrations, investment accounts and vehicles with “transfer on death” registrations, and real estate with beneficiary deeds): After presenting the financial institution holding the account, the DMV (in the case of vehicles), or the county records office and mortgage company (in the case of real estate) with a death certificate (and trust documentation or notarized trust certification in the case of a living trust), the asset will pass on to the beneficiary. An IRA can stay in the name of your spouse as an inherited IRA and the beneficiaries would only need to take required minimum distributions according to their life expectancy. Other qualified plans may need to be paid out to the beneficiaries over 5 years but the beneficiaries can avoid this by rolling the accounts into inherited IRAs, which can be stretched over their lifetime. Finally, as the spouse, you have the unique option to roll any inherited retirement accounts into your own IRA to defer the taxes as long as possible.

Make sure the bills are paid on time. Otherwise, you can get hit with late charges and a lower credit rating for late payments on any bills with your name on them. If you do get assessed late fees, ask to see if you can have them waived due to the circumstances. Cancel any services or subscriptions that are no longer needed (you may be able to get refunds) and put the rest in your name. Don’t forget that your spouse will still owe income taxes and while the federal estate tax return is due 9 months after their death, state estate tax return deadlines can be earlier.

Apply for benefits. If you or your children were receiving health insurance through your spouse’s employer, you may be able to qualify to continue it under COBRA. You may also be able to qualify for Social Security survivor benefits if you’re taking care of a minor child or are at least 60 years old and for VA benefits if your spouse served in the military. If you have a child in college, contact their financial aid office to see if you can qualify for additional aid. Finally, you may receive benefits from any unions your spouse was a member of.

Review and update your financial and estate plans. Re-assess your new income and expenses and make any adjustments that may be necessary. You might also want to run a new retirement calculation and consult with an estate planning attorney to see if you need to update any of your estate planning documents like an advance health care directive, will, durable power of attorney, and living trust. If your spouse owned a business, you’ll also want to consult with the business’ attorney on next steps.

Nothing here can ever make the loss of a spouse easy. Hopefully, it can make it a little less difficult though. Sometimes, that’s the best we can hope for.

 

 

 

How Long Should You Keep Financial Documents?

January 11, 2017

When sorting through paperwork or electronic statements and other records, you may be wondering how long to keep what. Generally speaking, if you can access something online, like a bank account statement, bill or insurance claims letter, you don’t need to keep a paper copy. As long as you’re able to log into an account and download statements, shred the paper (and discontinue receiving paper statements) and reduce clutter.

For other things like receipts and tax returns, a scanned electronic copy also suffices when needed, so if you want to organize your files electronically, have at it. Just make sure you have a secure place to store digital assets like an external hard drive or encrypted cloud-based account. However, there are still a few things that require the originals, such as a will, marriage license, Social Security card, etc. While there are no hard and fast rules for all documents, following are some commonly suggested guidelines for how long you need to keep even the digital copies:

Tax Returns: Seven years is the general rule of thumb for keeping tax returns and the related documentation like W-2s, receipts for charitable donations and other paperwork to support income and deductions claimed. The basis for this is that the IRS has three years to audit your return for any reason from the date of filing. If during an audit, the IRS finds a substantial omission, such as under reporting income by 25% or more, it has six years to challenge your return, so you want to have those documents available to address the challenge.

Life Insurance Policies:  Keep the original policy for the life of the policy plus 3 years.

Medical Records: For medical expenses you paid using a health savings or flexible spending account, you’ll want to keep receipts for up to seven years to show that the funds were spent on qualified expenses in case the IRS audits those accounts. Many HSA or FSA providers allow you to upload receipts for them to track. In that case, you can shred the receipts, but make sure you keep your online access for at least three years after you’ve spent the funds, just in case.

Receipts for Home Improvements: Any remodel projects or improvements that could enhance the value of your home can be added to your basis and possibly reduce any taxable gain when you sell your home, so keep these as long as you own the home for maximum tax savings.

Home Sale Documents: Once you’ve sold a home, you may be tempted to toss all the paperwork you signed back when you bought it, but keep the closing statement that shows you no longer own it in case a future mortgage lender asks for proof or there is any type of future title dispute on your old home.

Bank Statements/Credit Card Statements: Generally, it is recommended that you maintain one year’s worth of statements, unless they are easily accessible online through your bank.  If the statements support tax deductions, they should be maintained for seven years along with your tax files.

Utility Bills: If utility bills support deductions made on your tax return, they should be kept for seven years from the end of the year in which they were claimed. All other bills can be shredded after three months as long as you’ve verified they’ve been paid.

Pay Stubs: If you still receive paper pay statements, keep the latest stub if it contains the year-to-date salary history or keep a year’s worth of stubs until you receive the year-end check that recaps the entire 12 months of pay and the taxes withheld. This is especially important to consider if you’re planning to apply for a mortgage in the coming year so that you can prove your income. Once you receive your W-2 and verify that it matches your pay stubs, you can safely shred your old stubs.

Warranty Documents:  Dispose of these when the warranty expires or you get rid of the item under warranty.

Receipts for Purchases: Once you’ve verified that a charge to your bank account or credit card matches the purchase receipt, you may dispose of the receipt unless you need it for a future merchandise return. Pay special attention to restaurant receipts to ensure that the tip amount you wrote matches the charge to your account. Your receipt will serve as your proof if a wayward server inflates his/her tip.

Investment-Related Paperwork: It’s important to maintain a record of investment purchases in any taxable brokerage account so that you can properly figure any capital gains or losses when you sell. If you have stocks or mutual funds set up for dividend reinvestment, you’ll have multiple purchase transactions to track, so consider making a spreadsheet and keeping the statements as a back-up. You can get rid of any prospectuses you receive though (or sign up for electronic delivery and then delete the email). Investment management companies are required to provide these, but you can always find them online.

Things Not Worth Keeping: User manuals, which you can find online now and ATM receipts.

Things to Keep Forever in a Fireproof Safe or Bank Safety Deposit Box:

  • Birth certificates
  • Marriage certificates
  • Divorce decrees
  • Military discharge paperwork
  • Certificates of authenticity for any original artwork or other valuable property
  • Deed, car title – any document that would be difficult or impossible to replace

Once you determine which records you no longer need to keep, it’s important to properly dispose of them. Shredding the documents before putting them in recycling or the trash will help prevent identity theft. Then go and enjoy your less cluttered life!

 

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What a Financial Planner Told His Daughter After Her First Job

December 30, 2016

This week, I’m sharing a blog post from my colleague, Steve White:

My daughter is 22 and recently graduated college with a degree in human biology cum laude no less and she has a job working with a medical practice. (I’m a dad so I have to brag a little.) She has done several things that have reminded me why 1) being able to support yourself is important and 2) your kids do listen to what you say.

She called me when she got her first paycheck and said “Dad, I got a paycheck with a comma in it. Now you have to listen to me.” My father used to jokingly tell me that until I got a job with a paycheck, he didn’t have to listen to me, and yes, I jokingly told her the same (full disclosure – my dad did listen to me and I did and still do listen to my daughter). That paycheck with a comma in it meant that she now got to experience adult things that I’ve taken for granted like employee benefits. Her questions (and my answers) that we covered when she accepted her job included:

What health insurance do I sign up for? (the one that fits your situation) Should I check and see which one covers my prescriptions? (yes) If I take the high deductible plan, should I put money into the HSA? (yes) If I take the other plan, should I put money into the FSA? (yes)

How much life insurance should I get? (enough to cover your debt – see this life insurance needs worksheet) Who do I name as beneficiary? (whomever you want to – not me, name your mom) Wow, I don’t like thinking about if I die (Yeah, I know.)

Who is your beneficiary? (Mom) You need to name me as your medical power of attorney [see human biology major – cum laude] (I’ll think about it – aka no, let’s get back to your benefits.)

How do I fill out a W4? (What do the instructions say?) Will I have to file my own taxes? (yes) Can you help? (yes)

Thanks Daddy! (You’re welcome. What other benefit questions do you have?)

Do I need disability insurance? (yes) Why? (You’re statistically more likely to be disabled than die young – 24% chance of being disabled for 3 months or longer.)

Before she got her 3rd paycheck, she called me about budgeting, here’s how that one went:

Dad, I think I’m going to run out of money before I get paid again. (Oh, why is that?) I’ve got $23.42 in my bank account. (Yeah, I’d say that’s a possibility.)

I hate budgeting. (We all do sweetie.) Can you help me set up a budget? (Sure, I do it every day. That is one of the things I’m paid to do.)

(You remember when I decided to start watching what I ate?) Yeah, I remember you arguing with me about how many calories are in a fried pork chop. (Okay, besides that, when I thought about watching what I ate as a diet, I thought about in a negative light. I decided to think about it as an eating plan. That feels positive to me.)

Oh, I get it. I need to think about budgeting as a spending plan. (Yeah, just like you plan what you are going to eat, plan what you are going to spend.) Can you send me that spreadsheet thing you sent me before? (sure: Easy Spending Plan)

When she got her 3rd paycheck, our conversation went like this:

Dad, this morning at work, I was so excited that I got paid that I gave everyone a hug. (That’s nice.) I don’t think they expected that. (They have gotten a lot more paychecks. They have learned to restrain their excitement.)

I’m working on my spending plan and I’ve got a question. How much should I spend on lattes? (less than you do now) But I really like my soy double pump vanilla latte (I know), so what do I do? (Spend less on something else.)

But I need gas and food! (I know.) Dad – sometimes being an adult stinks. (I know.)

(Love ya sweetie.) Love you too Dad.

 

What to Do Before You Adopt

December 27, 2016

I recently had the joy of attending a party for friends that finalized the adoption of their son. I watch them go through the emotional highs and lows of their 18-month process. Afterwards, I asked them for lessons learned from the adoption process. They both said they wished that strategies to financially prepare for adoption were emphasized as much as the legal process. If they could go back, they would had put more emphasis on the following:

1. Assess your own finances. Ideally, you should have 3-6 months worth of living expenses saved (separate from the funds for adoption) so an emergency does not derail you from adopting.  Living expenses should be captured in a spending plan so you have a clear idea of how much you need to have monthly to maintain your living standard.

2. Calculate the best and worst case adoption expense.  The type of adoption you choose can dramatically affect adoption costs, which can range from $0 to $50,000. Include the costs of bringing the child(ren) into your household – furniture, clothing, school activities, extra healthcare insurance, etc.

Research the costs for the type of adoption you are considering and be prepared to be flexible. If an international adoption is cost prohibitive, a domestic program may be a consideration. Some state foster to adoption programs can be run privately, offering a plethora of services at minimum costs.

3. Research how you will come up with the funds. Calculate how much you can save per month and how long it will take for to have the funds for the expenses. If you find yourself short of funds, research alternatives. Think outside the box and network with other adoptive parents to come up with ideas. If you have a gift for spinning a compelling story, consider starting a GoFundMe fund, conduct a fundraising activity or ask your employer about adoption assistance.

4. Understand tax incentives for adoptions.  Aside from your employer’s adoption assistance, research the various tax incentives for adoptions. IRS Publication  Topic 607 spells out expenses that qualifies for the adoption credit and adoption assistance programs. There is a nonrefundable credit for qualified adoption expenses and possibly an exclusion of income for employer-provided adoption assistance.

Don’t make the same mistake as my friends. Consider taking some time to research not only the adoption legal process but also the financial impact an adoption may have on your finances. The better prepared you are, the less likely a financial hiccup will affect your desire to grow your family.

Why I’m Making Pre-Tax 401(k) Contributions

December 22, 2016

Last week, I wrote about how I’m investing in our company’s new 401(k) plan. That wasn’t the only decision I had to make though. Another choice was between making traditional pre-tax versus Roth contributions. Here are three reasons why I chose the former:

I expect my tax rate to be lower in retirement. The choice is basically between paying taxes now versus later. I’m currently in the 28% federal income tax bracket and the 6.65% NY state income tax bracket for a total marginal tax rate of 34.65%.

When I retire, my tax brackets are likely to be lower and I may end up living in a state with a lower state tax rate or even no state income tax at all. This is partly because I’ll need less income in retirement (especially since I won’t be saving for retirement anymore) and also because some of my retirement income will be coming from a tax-free Roth IRA. If I do end up being fortunate enough to retire in a higher tax bracket, I won’t mind paying the higher tax rate on my 401(k) as much since those additional dollars will be less valuable to me at that point.

I’d rather invest the tax savings outside my 401(k). With the pre-tax contributions, I get that 34.65% that would normally go to Uncle Sam if I made after-tax Roth contributions. I can then invest those tax savings in practically anything I want. Yes, I’ll have to pay taxes on the investment earnings, but I estimate that my higher expected returns in those outside investments will outweigh the taxes.

I can convert to a Roth later. One thing I love is keeping my options open. When I eventually leave the company, I can convert my 401(k) into a Roth IRA. (I’ll have to pay taxes on anything I convert so hopefully my tax bracket will be lower in at least that year.) However, if I choose the Roth option, there’s no way to go back and recover the benefit of lower taxable income.

Does this mean everyone should make pre-tax contributions? Absolutely not. If you expect your tax rate will be higher in retirement or if you’re maxing out your contributions and want to shield as much of it from taxes as possible, the Roth option would probably make more sense. As always, the best choice depends on your particular situation. Just remember that either choice is better than not contributing at all (or delaying due to analysis paralysis).

 

 

How Charitable Contributions Can Reduce Your Estate Taxes

December 01, 2016

A few weeks ago, I wrote about whether you might have a taxable estate. If you’re unfortunate (or fortunate) enough to have an estate large enough to be subject to estate taxes, there are several ways you can reduce that liability while helping your favorite charity. Here are a couple of the most common:

Lifetime giving. If you give assets away before you die, they can reduce the total amount that you can pass on estate-tax free at death. For example, you can pass on $5.45 million (twice that as a married couple) tax-free in 2016. If you give away $1 million, your $5.45 million exemption is reduced by that $1 million to $4.45 million. Otherwise, people could easily give away their entire estate tax-free on their death bed.

There are a few exceptions to this though. One is that you can give away $14,000 per person to an unlimited number of people per year without reducing your estate tax exemption.  (You can use up to 5 years of that $14,000 exemption upfront by gifting it to a 529 education savings plan.) Another exception is for gifts made to charitable organizations. You can give an unlimited amount to charity while alive or at death without any estate or gift tax consequences.

Charitable remainder trust. A more sophisticated method is to use a type of irrevocable trust called a charitable remainder trust. In addition to reducing your estate taxes, this strategy can also reduce your income taxes and increase your after-tax investment income. That’s because you get a charitable deduction for the value of the assets donated to the trust, the trust can then sell the assets without a capital gains tax to pay you an income stream, and then the remainder is passed on to the charity estate tax-free at your death.

For example, let’s say that you have investments worth $1,000,000 that you originally purchased for $500,000. If you sold those investments and paid a 15% capital gains tax, you’d end up with $425,000 after-tax. If you earned  a 4% income from that, you’d have $17,000 of investment income.

On the other hand, if you donated the $1,000,000 of assets to a charitable remainder trust, you’d get a deduction of the $1,000,000 donation from your income taxes. At the 35% tax bracket, that would be worth $350k in tax savings (plus $38k from the net investment surtax). In addition, the trust can sell the investments without a capital gains tax and pay you a 4% income from the full $1,000,000 which would be about $40,000 per year or $23,000 more annual income than you would otherwise be getting after the capital gains tax.

The big downside is that you wouldn’t be able to pass the remainder on to your heirs. However, you can replace that inheritance by purchasing life insurance inside an irrevocable life insurance trust. Since the trust is irrevocable, the life insurance proceeds would not be part of your taxable estate.

Of course, there are other strategies to reduce your estate taxes so if you have a taxable estate, you’ll want to speak to a qualified estate planning attorney to understand all of your options. The main point is that you can do well for yourself by doing well for others. Now if only I had a taxable estate to worry about…

 

 

Should You File Your Taxes Jointly?

November 16, 2016

Post updated 1/17/2018

I remember the first year after my brother got married, when he called to ask me a tax question and shared that he and his new wife had decided to file “single” status because that way they both got refunds. I felt like a real jerk crushing their refund joy when I told them that they don’t actually get to choose. Once you’re married, your choices are narrowed to “married filing jointly” or “married filing separately” (or MFJ versus MFS).

Generally speaking, the government wants married people to file joint returns, so they make it pretty unattractive to file separately (although that’s gotten better with the new tax rules), even though the “marriage penalty” is real when it comes to tax brackets and other limitations. For most married couples, it makes the most sense to file jointly. But there are some instances when it might make sense to file separately: (You can switch from year to year.)

One spouse has high medical expenses but a low income: This would make it easier for the doctor bills to exceed the 7.5% threshold necessary to deduct medical costs.

One spouse explores more creative methods of tax avoidance: When you sign a joint return, you’re accepting legal responsibility for everything on the return. If you know your spouse takes liberties with tax deductions, you may want to file separately to protect yourself if the IRS comes calling. There is such a thing as innocent spouse relief, but you have to prove you actually didn’t know of the questionable practices to qualify.

You’re heading for single status anyway: Your filing status is determined based on your marriage status on December 31st. If you’re in the process of getting divorced, but it isn’t final by the end of the year, you may choose to file separately to avoid being tied together by tax issues after the marriage is over. When I got divorced many years ago, we filed in December, but the divorce wasn’t final until January. We filed a joint return that last year and agreed to split the refund, but that only worked because we still had a modicum of trust with each other on financial issues.

However, most couples choose to file jointly as there are many drawback to filing separately:

Tax brackets may be less favorable. MFS marginal brackets have taxpayers jumping up to higher brackets at lower incomes than MFJ taxpayers.

You may have lower deductions and credits. If one spouse itemizes, both have to even if one spouse would receive a higher deduction using the standard amount. Spouses split joint deductions like mortgage interest for a mortgage in both names, but charitable deductions and other itemized deductions go on the return of the spouse that paid them, which could leave a spouse with very few itemized deductions claiming less than they’d get as a single taxpayer.

If you file MFS, you also cannot claim many credits and deductions such as the earned income credit, adoption expenses, child and dependent care and education credits, and the student loan interest deduction. In addition, the child tax credit is reduced and you can only deduct $1,500 of capital losses per year versus $3,000 for MFJ.

For most people, filing jointly will make the most sense. The best way to decide would be to figure out your taxes both ways. Many tax software programs do this analysis for you. Then file according to the method that leads to the lowest overall tax bill for your family.

 

 

Can You Deduct Your Job Hunting Expenses?

October 19, 2016

Editor’s note: Please note that all miscellaneous deductions were eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

Did you know you might be able to deduct your job search? If you itemize deductions on Schedule A of your tax return and incurred significant expenses while searching for a new job in your field, you may be able to reduce your taxable income by keeping track of them. Here are the rules and caveats:

  1. Most importantly, job search expenses are considered to be miscellaneous deductions, which means they need to exceed 2% of your adjusted gross income (“AGI”) before you can even include them as deductions. To roughly calculate AGI, add up your total income (including interest, dividends, capital gains, alimony received, wages and self-employment earnings), then subtract any pre-tax IRA or 401(k) contributions, HSA contributions, moving expenses, alimony paid and student loan interest1. Multiply that by .02. If your job search expenses are in the ballpark of the result, then it’s worth tracking.
  2. It’s also important to realize that this does not apply if you’re actually switching careers. If you’re thinking of leaving your corporate job to be a yoga teacher, you won’t be able to write off the cost of your teacher training. Only expenses incurred while searching within your current field from one job to another qualify. This also means you can’t write off expenses associated with your first job or even after long breaks away from working unless you were searching the whole time. In that case, keep as much data as possible to prove you were actively seeking work during that stretch to prove it – things like calendars, cover letters submitted, receipts for travel, etc.
  3. Here’s what you can deduct, according to the IRS:
    Resume costs – anything you spent preparing and mailing your resume (if you actually mailed it to anyone!)
    Travel expenses – if you take a trip primarily to interview or seek a job
    Meals – if you happen to have lunch with someone to discuss a job while you’re on vacation, you can only deduct 50% of the cost of the lunch plus any transportation costs directly related to getting to lunch like parking or a cab
    Agency fees – the cost of using a placement agency to help you land interviews
    Networking events – attending events to meet prospective employers or even people who can help you meet prospective employers as long as that’s what you’re there to do – aka you’re actually asking people for help with landing a job
  4. Make sure you keep a solid record of any expenses you plan to deduct. The best way to remember what you need to note is to think of it like an invitation. You need a record of:
    Who was there
    What were you doing
    When you incurred the expense
    Where the expense was incurred (like the name of a restaurant)
    Why it would qualify as a job-search expense

Don’t forget that if you do land a new job in your field that requires a move, you may be able to deduct those expenses too! Searching for a new job can be a tedious and expensive process. Make sure you track the expenses to avoid paying more taxes than you need to.

1 Disclaimer: Not an exhaustive list of “above the line” deductions, but the most common

 

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How to Deduct Your Moving Expenses

October 12, 2016

Editor’s note: The moving expense deduction was eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

I know several people who have embarked upon long distance moves recently, which also means that they were often changing jobs. My first question when I learned of the moves was, “You know you can deduct your moving expenses, right?” First, here’s what the IRS has to say about it:

If you moved due to a change in your job or business location or because you started a new job or business, you may be able to deduct your reasonable moving expenses but not any expenses for meals [emphasis added]. You can deduct your moving expenses if you meet all three of the following requirements:

  • Your move closely relates to the start of work
  • You meet the distance test
  • You meet the time test

Here’s what that means:

Related to the start of work: Your move doesn’t have to be because you got a new job, but the two events do need to be closely related. Specifically, you can deduct moving expenses incurred within one year from the date you first started your new job.

Distance test: Your new job must be at least 50 miles further from your old home than your old job was from your old home. If you weren’t working before you moved, then your new job must be at least 50 miles from your old home.

For example, when I graduated college in Michigan and moved to Cincinnati to start my new job, I was able to deduct my moving expenses. But when I moved to a new house in Cincinnati about the same time I started a different job, my new commute was only 5 miles longer than my old commute, so those expenses were not deductible. If you had a 5 mile commute that turned into a 55 mile commute and you switched jobs to work closer to home, you could deduct.

Time test: You have to work full-time at least 39 weeks during the first 12 months immediately after you arrive in your new location. If you’re self-employed, that time requirement increases to require full-time work for at least 39 weeks out of 12 months and for a total of at least 78 weeks during the first 24 months. So a self-employed person who works full-time for a year and 26 weeks from the day they arrive would qualify. There are exceptions to this rule for death, disability, involuntary separation, and a few other things. Publication 521 lists them all.

If you pass all of those tests, then you can deduct your moving expenses. It’s what we CPA geeks call an “above the line” deduction, which has a more favorable effect on your taxes than “below the line” deductions like mortgage interest, taxes and charitable giving. Moving expenses actually decrease your adjusted gross income, a number upon which other tax calculations are determined, including eligibility to deduct medical expenses and even your state taxable income.

What You Can Deduct

Generally speaking, you can deduct any expenses that were incurred to move your stuff, including travel. That includes the cost of storage up to 30 consecutive days, supplies such as tape, boxes, moving blankets, etc., any costs to move pets (I once had a client pay FedEx to move his horse from Florida to California) and your mileage for making the drive there. If your move involves an overnight in a hotel, you can also deduct that along with the cost of renting a moving truck. You’ll have to complete Form 3903 and file it with that year’s return and make sure you keep receipts for everything in case the IRS wants proof.

Remember, the purpose of the move doesn’t have to be because you found a new job. You can move to a new place because you want to move and as long as you switch jobs and meet the three tests, you also get a little tax boost to offset the costs. Moving is expensive. Take advantage of all the breaks you can get!

 

If you have questions that we can answer on the blog, please send me an email, and I’ll do my best to help. Did you know you can also sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. You may also follow me on Twitter and Facebook as well.

How to Calculate the Value of Your Benefits

September 26, 2016

Are you overlooking the real value of your benefits when you think about your compensation? According to the Bureau of Labor Statistics, benefits accounted for 31.4 percent of employer paid compensation for U.S. workers  in June 2016, with salary making up the other 68.6 percent. It’s “open enrollment” season, the time of year when employees make decisions about their health insurance and other employee benefits for the upcoming year. While you’re weighing your options, it’s a good time to practice some benefits appreciation.  One way to do this is to estimate how much the benefits you choose are worth to you:

Health Insurance (typically $5,000 – $30,000)  – Your health insurance is a significant component of your benefits.  How can you value what your employer contributes for you and your family, as well as the discount you receive on coverage for participating in a large group plan? According to the 2016 Milliman Medical Index, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan is $25,826, with employers typically picking up 57% of the cost. That means that participation in their company sponsored health care plan is worth at least $14,721 for that typical family at the typical employer. Of course your insurance costs may be different, and your  employer may subsidize more or less of that.

More and more employers are also offering high deductible health plans in conjunction with a health savings account (HSA). In many cases, they’re contributing to the employee’s HSA as well. HSAs are a widely misunderstood and underrated benefit, and if you fully utilize your HSA, the long term tax advantages can be a benefit to you in retirement.

Retirement Plan (typically 3-6 percent of your salary in matching contributions) – While companies aren’t required to make matching contributions to what employees save for retirement, most companies with employer-sponsored 401(k) plans are offering this benefit. According to the Society for Human Resource Management (SHRM), 42% match employee contributions dollar for dollar up to a certain amount. 56 percent of companies require workers to save 6 percent or more in order to receive the full employer-matching contribution.

There’s also the value of having an employer-sponsored retirement plan in the first place. If you don’t have one as an employee, you won’t be able to save as much for retirement in tax-advantaged accounts. The consequence: employees without a work-sponsored retirement plan are far less likely to save for retirement. In fact, according to the National Institute on Retirement Security, 45% of working age households in the U.S. have zero retirement account savings.

Stock Purchase Plan (typically 10 to 15 percent of market value per share purchased) – In a typical stock purchase plan, the employer offers employees the opportunity, but not the  obligation, to purchase publicly traded company stock at a discount from the market value.

Disability Insurance ($2,000 to $5,000 per year) – Premiums for insurance that replaces a portion of your income if you can’t work due to a non-work related illness or injury can be paid for by the employer, employee or both. Purchasing this insurance as individual policies would be quite expensive. Group policies are much less expense per covered employee, so even if you’re paying some or all of the premiums yourself, you’re getting a good deal. That is if you have access at all. According to the Bureau of Labor statistics only 25 percent of U.S. employees have access to both short and long term disability insurance benefits through their employer.

Life Insurance ($250 to $500 per year) – Many large employers cover their employees with term life insurance at one times their annual salary. Supplemental term coverage is often available for a low, additional cost.

Employer Contribution to FICA (7.65 percent of salary) – What is FICA and why does it get so much money from my paycheck?! FICA stands for Federal Insurance Contribution Act, e.g., Social Security and Medicare, and your employer pays just as much as you do towards both programs.  The employer contribution adds up to total of 7.65 percent of your salary and bonus. When you are retired and draw Social Security and utilize Medicare for health insurance, know that your employers were partners in getting you there.

Unemployment Insurance (0.3 – 1.5 percent of salary) – Under the Federal Unemployment Tax Act (FUTA), employers pay your unemployment insurance, not you, as well as most states. If you lose your job through no fault of your own, and you meet your state’s requirements, you can file for unemployment benefits for some period of time (which varies by state). Like all types of catastrophic insurance, you hope you won’t have to file a claim – but it’s comforting to know that it’s there if you need it.

Other great benefits –  Your company may offer other benefits such as tuition reimbursement, pre-paid legal assistance, commuter benefits, health and wellness programs, access to group long term care insurance, etc. Before you make decisions during open enrollment, check and see if your company has a workplace financial wellness program. That is the benefit which helps you understand all your other benefits.

Do you have a question about workplace benefits? Please email me at [email protected]. You can also follow me on Twitter @cynthiameyer_FF.

 

How To Take Money Out Of Your Accounts In Retirement

September 22, 2016

Updated April, 2018

We typically spend most of our working life putting money in accounts for retirement, but how do we take them out after we retire? I recently received a question from a “long time reader, first time caller,” about how to order which accounts he will withdraw from when he retires soon. The conventional wisdom is to withdraw money first from taxable accounts, then tax-deferred accounts, and then tax-free accounts in order to allow your money to grow tax-deferred or tax-free as long as possible. However, there are a few other things you might want to consider too:

Will you need to purchase health insurance before you’re eligible for Medicare at 65? If so, your eligibility for subsidies under the Affordable Care Act is partly based on your taxable income. In that case, you might want to tap money that’s already been taxed like savings accounts and money that’s tax-free like Roth accounts to maximize your health insurance subsidy (but not so low that you end up on Medicaid instead). You can use this calculator to estimate what that amount would be.

Are you collecting Social Security yet? Withdrawing from tax-free Roth accounts can also reduce the taxes on your Social Security. That’s because the amount of your Social Security that’s taxable (either 0, 50%, or 85%) depends on your overall taxable income plus nontaxable interest (like muni bonds) but not tax-free Roth withdrawals.

How can you minimize your tax rate? First, you’ll want to withdraw (or convert to a Roth) at least about $12k a year from your pre-tax accounts because the standard deduction makes that income tax-free. If you have other deductions, you may be able to have even more tax-free income. Then take a look at the tax brackets and see how much income you can withdraw before going into a higher bracket.

For example, a married couple’s first $19,050 of taxable income is only taxed at 10%, with the next $58,350 is taxed at 12% according to 2018 tax brackets. Any long term capital gains at those levels are taxed at 0%. If you’re about to go into a higher bracket, you may want to use tax-free income to avoid those higher rates. Just keep in mind that pensions and taxable Social Security (see above) will also count as income in determining your tax bracket.

How do you put it all together? Your withdrawal strategy may change and adjust based on the situation. You may tap into savings accounts (including your HSA) and sell taxable investments to maximize your health insurance credits until 65. Then you may withdraw from taxable accounts until you collect Social Security benefits at age 70, which draws down your required minimums at 70 1/2 while maximizing your Social Security payment. At that point, you can continue withdrawing from your taxable accounts to fill in the lower tax brackets and then use tax-free accounts to avoid the next tax bracket.

Of course, this all assumes that you have investments in multiple types of tax accounts. Otherwise, it doesn’t really apply to you. But if you do, you might want to consult with a qualified and unbiased financial planner to help you sort it out and come up with the right strategy. If your employer offers that as a free benefit, it might be a good place to start.

 

Why You Should Roll Your 401(k) to Your New Employer

September 19, 2016

When changing jobs, what should you do with your employer-sponsored retirement account balance? Our blog editor,  Erik Carter, JD, CFP®, recently wrote a post titled What Should You Do With That Old Retirement Plan, in which he stated that if he left an employer, he would be very likely to roll over his retirement account balance to an IRA in order to have access to more investment choices. Erik outlined a job-changing employee’s four options: 1) leave the money in the former employer’s plan, 2) cash out your account, 3) roll over your balance to a new employer or to an individual IRA or 4) purchase an immediate income annuity (if it’s a feature of your former plan.)

Option 3, rolling over your balance, is by far the preferable choice for the large majority of retirement savers. For most people, it may make more sense to roll their retirement plan balance to their new employer’s plan rather than an IRA. Here’s why:

Lower Fees

Many 401(k) plans offer participants access to institutional share class mutual funds and very low cost index funds, especially those sponsored by large employers. Conversely, investing in your IRA can get expensive if you aren’t careful to monitor the mutual fund fees, trading costs and account fees. Before you make your distribution decision, compare and contrast the fees for all your options, including leaving your account with your previous employer, rolling your balance to an IRA and rolling it to your new employer. Not sure which option offers you the lowest cost of investing, given the type of investments your want to choose? Use FINRA’s free mutual fund fee analyzer tool.

Keep it Simple

While it’s true that there is a broader universe of investment options in a self-directed IRA account at a brokerage firm or mutual fund company than in your workplace retirement plan, many investors don’t need or want that kind of customization in their investment strategy. Keeping your retirement plan balances in one place allows you to see at a glance the investment mix of your retirement savings and how much you’ve saved simply by logging on to one site. If you’re a more “hands-off” investor, a target date fund in your plan with a date near your target retirement can offer you an easy, diversified, one-stop-shopping investment strategy.

Protection Against Lawsuits

Balances in retirement plans, such as 401(ks), are protected against civil judgments and bankruptcy. (But if you owe taxes, your 401(k) assets can be seized to settle the tax debt – and you’ll have to pay more taxes and a 10% penalty if you take an early withdrawal to settle the bill.) The higher your income and/or net worth, the more important it is to consider this factor. However, depending on where you live, your state may not extend that protection to IRAs.

Borrowing Power

Many 401(k) plans permit participants to borrow from their plan assets at a very low rate of interest. If you roll your old plan into your new plan, you’ll have a bigger base of assets against which to borrow. (A common borrowing limit is 50% of your vested balance up to $50,000, but check with your plan administrator for the specifics of your plan.)

While the disadvantages usually outweigh the advantages in borrowing against your retirement plan, there are times when it may make sense, such as preventing eviction, foreclosure or auto repossession, paying off very high interest debt or putting 20% down on a home purchase to avoid PMI. Keep in mind that you’ll repay the loan with after-tax dollars so you’ll end up being double-taxed on the interest when you eventually withdraw it, and those funds won’t have access to market performance during the loan repayment period. Also, if you leave your company for any reason before the loan is repaid, your unpaid balance becomes a taxable retirement plan distribution, subject to a 10% penalty.

Workplace Financial Guidance

More and more companies are offering workplace financial wellness programs, where financial education and guidance are offered to employees as an employer-paid benefit. Can you attend a workshop or webcast, use an online learning resource or work one-on-one with a financial coach? More 401(k) plan sponsors also offer access to robo advice, where an online investment adviser service sets your investment mix based on your risk tolerance and time horizon and regularly re-balances your portfolio.

How about you? What do you think is a better idea: rolling an old retirement plan into an IRA or into your next employer’s plan? Email me at [email protected] or let me know on Twitter @cynthiameyer_FF.

 

 

Should You Contribute Pre-tax or Roth?

September 15, 2016

That’s one of the most common questions we get. For example, I recently received the following email: (My response follows.)

I am a 26 year old in my fourth year as a police officer. I’ve been contributing to my employers 401a and deferred comp programs for about 3 years. My contributions have been Roth and after reading your article, I’m wondering if that’s the best option for me. I have a part time job at the local mall that matches 5% of pre tax contribution and I max out there as well. I don’t plan on using the money until retirement, so should I switch my main employer to pre tax as well? This year I’ll make around 60-70k, but next year I’ll probably make around 80k. My goal is to save near a million dollars for retirement and I’m not quite sure how to figure my retirement income. Can you guide me in the right direction?

First of all, great job on contributing to all those retirement accounts at such a young age! The earlier you can save for retirement, the longer that money will be working for you. This will definitely put you in a much better position for retirement.

The basic decision is whether you’d rather pay taxes on your savings now (Roth) or when you take them out of your retirement account (pre-tax). Assuming you’re single, you would currently be in the 25% tax bracket so every dollar you put in those retirement accounts pre-tax is avoiding a 25% tax rate. If you retire with a million dollars, you could safely withdraw about 4% or $40k a year. In addition to the $28k of Social Security benefits you’re projected to receive at your normal retirement age of 67, your $68k of total retirement income would put you in the same 25% tax bracket at retirement.

Not all your retirement income would be taxed at 25% though. Based on your total retirement income, only 85% or about $24k of your Social Security benefits would be taxable. At least about $10k of your income wouldn’t be taxed because of the personal exemption and standard deduction so your taxable income would be no more than about $54k. Using today’s tax rates (which are adjusted for inflation), the first $9,275 of taxable income would be taxed at 10%, the next $28,374 would be taxed at 15%, and only the last $16,351 would be taxed at that 25% rate. As a result, your average or effective tax rate in retirement would actually be about 17%.

Of course, this assumes that you don’t have a lot of deductions like mortgage interest that would go away by the time you retire. It also assumes that the tax code stays the same. If your effective tax rate ends up being higher in retirement, you would be better off with a Roth account.

Confused? One simple solution would be to diversify by contributing pre-tax to your employer’s retirement accounts as well as to a Roth IRA. That’s because the Roth IRA has the additional benefit of the contributions being available anytime without tax or penalty. It may also be helpful to have some tax-free money in retirement to qualify for higher health insurance subsidies if you decide to retire before you’re eligible for Medicare at age 65.

Don’t overthink it though. Whichever option (or combination of options) you choose, the most important thing is that you’re contributing for retirement. The less optimal option is still much better than not saving at all.

 

 

 

How Should You Calculate Your Tax Withholding?

September 01, 2016

Do you end up owing too much to the IRS during tax season or get back a big refund? The former can be a nasty surprise and even lead to penalties if you owe too much while the latter means that you made a large interest-free loan to Uncle Sam. In any case, if you’re unhappy with the result or had a significant life event like a like a change in your job or family situation, you may want to adjust your tax withholding. I usually owe a little bit but this year, I got a sizeable refund because of expenses my rental properties. Here are my experiences with some of the ways to calculate the right number of allowances to claim:

Form W-4 Personal Allowances Worksheet: This is probably what most people use since it comes with the form you give to your employer to determine withholding. It’s pretty simple to fill out if you don’t itemize, but if you do, it will require you to have your tax return and do some calculations. According to the worksheet, I should continue to take 2 allowances (assuming my math was correct for the itemized part).

The IRS Withholding Calculator: Since this is an official IRS calculator, it’s often the next stop for those who want a more sophisticated calculation or don’t want to do their own math. The downside is that it feels like an official IRS calculator. It actually took me longer to complete and in addition to my tax return, I also needed to lookup info from my last paycheck. It suggested that I increase my allowances to 3 to reduce my refund to about $75.

TurboTax Withholding Calculator: I use TurboTax to prepare and file my taxes, but I was disappointed in their withholding calculator. I actually found it to be as time consuming to fill out as the IRS one but it left some info out. As a result, it ended up telling me to stick with the original 2 allowances.

Kiplinger’s Easy-to-Use Tax Withholding Calculator: This calculator lived up to its name. I still needed my tax return, but it only asked 3 questions and directed me where to look for the answers on my return. However, its suggestion of increasing my allowances by 3 to increase my monthly take-home pay by about $280 was the most radical. Given the simplicity of the required inputs and the outlying result, I’m a bit skeptical of the accuracy of this one, at least for more complex tax situations.

My personal verdict is to simply use the form W-4 worksheet. I had to do a little math but it was still one of the least time-consuming. The IRS calculator probably gave me the most accurate estimate, but I personally don’t mind having a little extra withheld, especially since my rental property deductions may not be as high this year. It’s not like I’d be earning much interest these days on that extra money anyway.

However, if you’d like to make your withholding more precise, you may want to use one of the online calculators. I’d suggest the IRS one for accuracy and the Kiplinger’s one if your tax return is really simple. Leave TurboTax to the actual return.

 

4 Financial Moves I Wish I’d Made in My 20’s

August 24, 2016

Whenever I have the opportunity to work with an employee who is just starting their career by calling the Financial Helpline to make sure they’re making all the right financial moves, I can’t help but gush a little bit. This simple phone call often sets into motion actions and habits that will legitimately change the course of this person’s life. I often wonder how my life would have been different if I’d had the Financial Helpline to call for unbiased financial guidance from someone who would have given me a straight answer, no strings attached. If I could turn back time, here’s what I’d have done differently:

Joined an HSA plan as soon as it was offered. I still remember the hoopla in the financial services community when health savings accounts were first rolled out, but I didn’t get it. I wasn’t yet a financial planner, so I didn’t fully understand why anyone would sign up for a health insurance plan that could cause them to pay full price for the first couple thousand dollars in healthcare expenses each year, and didn’t even consider signing up. Similar to many people’s logic, I avoided the HSA due to the high-deductible without taking into consideration the fact that my employer was willing to fund some (or all) of that deductible and based on my lack of health issues, I was unlikely to spend even that. By the time I realized the beauty of the HSA, I only had a couple years before it was time to switch to more comprehensive coverage since I knew my costs were going to increase.

Opened and funded a Roth IRA. I’ll never forget the day I stepped into my co-worker Tom’s office and asked him to open a brokerage account for me to begin investing in an index fund with the extra money I had been paying toward my low-interest student loan. Tom looked at me and said, “Are you sure you don’t want to use that money to fund a Roth IRA instead of a taxable account?” I nodded, thinking that I didn’t want to kiss that money goodbye for the next 35 years, so I opted for a regular brokerage account.

I was wrong. Had I instead used that money to fund a Roth IRA, I still would have had access to my deposits without tax or penalty, and I would never have to pay taxes on the growth of my investments after age 59 1/2. When asked by young people about priorities in savings, I never waiver in my answer:

  1. First get the match in your 401k. It’s free money, enough said.
  2. Then max out your HSA. If you don’t need the money tax-free for healthcare expenses, you can access it like a normal retirement account after age 65. It’s also often free money.
  3. Then fund a Roth IRA. While you are still under the income limits and the money has years to grow, take advantage of it.

Created a pet care fund. I adopted my first cat, Hattie May, my senior year of college and over the course of her short 13 year life, I estimate that I spent at least $5,000 on her care. The worst part about this is that I should’ve spent more to take care of her issues, but because I didn’t have money set aside, I skimped. This is something I’ll forever regret and I often wonder if she’d still be alive today if I’d prioritized saving for her costs. Here’s what I should’ve done: find out the cost of pet insurance for annual visits plus emergency care and then instead of buying the insurance, set that amount aside each month into a separate savings account. That way when things did come up, I would’ve had money available and if nothing came up, I wouldn’t be out the money.

Spent less money on cheap clothes. Confession: I engage in retail therapy with the best of them. I just wish I could go back to those early years and made a few less trips to stores like Old Navy and Target, where I succumbed to merchandising brilliance and bought clothes I maybe wore twice. I could’ve re-routed that money toward Hattie’s fund or a Roth IRA. The worst part is that when I went through periods of closet-cleaning during those years, I didn’t receive any tax benefit from donating those clothes as my itemized deductions weren’t high enough to qualify.

What I wish I’d done is put a limit on myself for impulse shopping. I don’t believe in going cold turkey. I do think we can all handle moderation though.

I can’t turn back time, but I can share the wisdom of my mistakes so here’s hoping you can learn from mine. What financial moves do you wish you could do over? Let me know on Facebook or send me a tweet.

Did you know you can sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. Obviously, I suggest at least “Posts from Kelley.” Thanks for reading!

 

What Should You Do With That Old Retirement Plan?

August 18, 2016

One of the questions I get from time to time on our financial helpline is what someone should do with their retirement plan when they leave a job. They often end up simply leaving the plan there, but that’s not always the best choice. Let’s look at the options:

Leave the money there. This is typically allowed as long as you have at least $5k in the plan. If you’re retired, you may be able to take periodic withdrawals. It’s the simplest choice because it requires no action from you.

Some good reasons to leave the money there are because you want to have access to a unique investment in the plan or you’d like to pay a lower tax on the appreciation of any employer stock in the plan when you eventually withdraw it. Otherwise, you’re probably better off rolling into another retirement plan to consolidate your accounts and provide you with more investment options. You’ll also have to take a required minimum distribution from each 401(k) and 403(b) you have at age 70 1/2 (unless you’re still working there).

Take the money and run. You can have them send you a check for the balance. However, you’ll have to pay taxes (plus potentially a 10% penalty if you’re under age 55 or if you’re under age 59 ½ and you left your employer before the year you turned 55) on it. If it’s a large enough distribution, that money could also put you in a higher tax bracket.

Roll it over. If you don’t want to leave the money behind or send a big check to Uncle Sam, rolling it into a new retirement account allows you to continue postponing the taxes on it. An IRA generally gives you more investment options while rolling it into your employer’s plan can allow you to consolidate your retirement accounts and possibly give you the option  of borrowing against it. If you change your mind, the money you roll into your employer’s plan can typically be rolled into an IRA and vice versa.

Turn it into guaranteed income. Some plans allow you to use your retirement plan balance to purchase an immediate income annuity at discounted rates (and hence you’d get higher payments) or even into a pension plan if you have one. This provides an income that you can’t outlive and avoids any early withdrawal penalties. The downside is that you generally give up the lump sum of money and should only be considered when you’re ready to retire.

Personally, I’d roll my 401(k) into my IRA if I were to leave Financial Finesse because I’d like to have more investment options. I also know people who prefer to keep things simple by rolling everything into their current employer’s plan. If you’re still not sure what to do, consider speaking to an unbiased financial professional.