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A Money Back Guarantee

Apr 24th, 2013
by sraskie.
2 comments

 

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You’ve heard the saying before that there are a few guarantees in life: death and taxes. I’d also like to add another: guaranteeing yourself a rate of return. I get asked this question frequently, usually by someone who’s a conservative investor or someone looking for a “sure thing”. This is what I tell them and I am telling you. Call this your money back guarantee. For the majority of readers, this will come into play as most of you have debt in some form or another. Whether it’s your mortgage, automobile, boat, credit cards, college, many Americans have different amounts of debt all at different interest rates. Typically, your consumer debt (credit cards) is going to have the highest interest rates.

Here’s how to guarantee yourself a rate of return: PAY DOWN YOUR DEBT. By paying down your debt you will be guaranteeing yourself the rate of return equal to the interest rate you’re paying on the debt. For example, let’s say you have credit card debt of 15% on a balance of $10,000. Want to guarantee yourself a rate of return of 15%? Pay off your credit card. And fast. Do me a favor. Go on the Internet and search for a minimum payment calculator for credit cards. Many cards are now showing this in the fine print on their statements. For my example, I put in $10,000 debt at 15% interest and a minimum payment of $200. After 30 years, yes 30 years, the total payments made on that $10,000 of debt are $25,573 – and I still owe! An easy way to look at this is let’s say you paid off the card right away with $10,000. Right off the bat, you’ll have saved over $15,000 by not making minimum payments.

If you’re starting anew and this whole paying off debt thing is alien to you, try upping your payments (baby steps) or even getting rid of “luxury” items you don’t need until your debt is paid off, like cable TV, dining out, etc. and put that monthly cable TV, dining out money, etc., toward the debt you owe.

My suggestion would be to start on the highest interest rate debt you have first and then pay down from there. Once you’ve paid down that debt, move to the next highest interest rate and so on. Some people are in favor of starting on the smallest amount of debt first and going from there. The reasoning being that you can build momentum by getting at least something paid off quickly. From a strictly monetary standpoint, you’ll save more money paying down higher debt first, but feel free to use whichever method you prefer. Just do something!

Another idea when you start paying down your debt is to tack on an additional 10% or more on what you’re currently paying and keep increasing that percentage monthly or annually until you can pay it off in full. It’s exactly the same as the 10% toward saving more money, just used to pay down debt quicker.

One debt that you can consider just paying the regular monthly payments on is your mortgage. Nothing wrong with paying it down early – do it if you can. Given today’s interest rates being at historic lows (as of January of 2013) it’s not as big of a deal as 15% in credit card interest rates is. Plus, you can deduct the interest on your mortgage. In addition, with mortgage rates so low, a better investment return may be achieved elsewhere in the market, however, that extra return is not guaranteed. That being said over 15 years or 30 years as most mortgages are, you’re there’s a high likelihood of better returns.

One final caveat to consider is this: once you’d paid off a debt, act as though you still have to make the payment only this time (you guess it) pay yourself first. Continue to pay that “bill” only now direct it to your savings, IRA, college fund, etc.

Posted on Apr 24th, 2013
by author: sraskie.

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Posted in: budgeting, credit cards, financial planning, interest rate, investment, saving.
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Your State Income Tax Refund Card?

Apr 22nd, 2013
by sraskie.
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As of this writing there are about 7 states that have left issuing paper income tax refund checks in favor of plastic debit card. Those states include Georgia, South Carolina, Oklahoma, Virginia, Connecticut, Louisiana, and New York (New York still offers the choice of paper or plastic).

The main reasoning behind this new refund system has been to eliminate the costs associated with issuing paper checks, with the cost of printing and issuing cards now passed to the credit and debit card companies.

But the costs saved by the state may end up costing those issued the debit cards. Here’s how:

Most cards will allow a one-time withdrawal of cash free of charge. Those that want their entire refund in cash simply need to go to a participating bank (one that works with one of the major card companies) and request the withdrawal. After the one-time freebie, then fees can be from $2 to $10 per withdrawal.

There’s also a fee should you not use your card for a while. Go 6 months without using it and it could cost you $3 per month. Need a replacement card? That’ll be $10-$15 please.

Admittedly, these cards can be convenient for those that intend on spending the money, but should you want to save or resist the temptation, you can always make the free, one-time withdrawal, or simply set up a checking or savings account at your local bank and have your refund direct deposited. Another option is to consider having your refund issued in US Savings Bonds.

In my opinion, the issuing of cards could end up hurting the people who don’t have savings or checking accounts and are the ones that need them the most, and would be most adversely affected by the fees involved with the debit cards.

Posted on Apr 22nd, 2013
by author: sraskie.

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Posted in: #noTOP.

How Financial Advisers Get Paid

Apr 19th, 2013
by sraskie.
1 comment

 

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As you begin your search for a financial professional it’s going to be important to know how the particular professional you choose will get paid. It will also be important to ask questions not only in regards to their compensation, but who actually pays the adviser.  There are generally three ways in which financial advisers and planners get paid.

Commission:  An adviser that’s paid on commission generally gets paid based on the underlying product they sell. Commission rates vary depending on the product sold – anywhere from 5% to 50%. Term Life insurance for example, will have roughly a 40% commission rate on the annual premium for the first year. Whole Life insurance is generally 50% the first year. The difference being Term Life may have an annual premium of $1,000 where Whole Life may have an annual premium of $5,000. It can be difficult to be objective when an adviser can make $2,500 versus $400 in commissions. Other commissioned products include load mutual funds that charge a load or commission on the initial purchase (i.e. a $1,000 investment with a 5% load means your net investment is $950), annuity products and individual stocks and bonds purchased through a broker.

Fee-Based: Fee-based is essentially a combination of commissions and fees. Generally speaking a fee-based adviser will get paid on commissions on certain products, and will get paid a fee on different products. For example, an adviser that sells life insurance and annuities as well as investment management can get paid commissions for the life and annuity products, and can choose to be paid a flat fee or percentage of the assets in the investment management account. Some products are fee-based, but pay the adviser a commission to sell them. For example, you invest in an asset management account where the annual fee is 2% to have your money “professionally managed”. You may only see a 2% charge for your fee, but the adviser that sold you the program, may receive a commission. This is generally seen in proprietary asset management programs of various companies and brokers. In both circumstances, the adviser is compensated by the product sold.

Fee-Only: Fee-only means that your adviser or planner gets paid directly by you. Therefore, fee-only advisers and planners are compensated for their advice, not on a product they sell. Fee-only advisers get paid a few different ways. The first way is strictly on an hourly basis, similar to how an attorney gets paid. Generally they will give you an estimate that will show you a range of what your fee will be such as $500-$950 for a financial plan. Another way that advisers get paid is via a flat fee for any assets (investments) of yours that they manage for you. This can range from .25% to 2% depending on the amounts invested. Some planners have minimums (i.e. you need $50,000 of assets to work with them) and some do not. Most will have a graduated fee schedule where the more money you invest, the lower your fees get based on certain thresholds.

Many fee-only advisers will take you “off the clock” meaning that once you become an AUM client (assets under management); they will no longer charge you by the hour for advice and questions. Be careful of advisers that “double dip” by charging fees for both managing your money and by the hour for other questions and planning. Make sure their advice is worth the extra money.

Finally, fee-only is very transparent, meaning that you see exactly what you’re paying either from your checkbook or from your quarterly statement.

Of the three, fee-only is arguably considered to be the most objective, yet not 100% perfect. Think of it this way, it can become extremely difficult (although not impossible) for a commissioned adviser to be truly objective when they only way they are compensated is if they sell you something. It becomes even more difficult if their job is on the line, they have a quota to meet, or an incentive such as a company trip dangling in front of them. That being said, all three ways have their advantages and disadvantages. It all comes down to what you’re comfortable with, and whom you’re comfortable with. Do your homework, ask lots of questions. Above all, any adviser no matter how they get paid should put your interests first – above all else. Consider an adviser or planner that is a fiduciary. This means that they are legally obligated to put your interests first.

Lastly, an advisers commissions and fees are not inclusive of the expense ratios and fees of the products they put you in. For example, you could pay a 1% fee to a fee-only adviser  but they have you in a mutual fund that charges 1.5% in expenses. Or a commissioned adviser could sell you an annuity that had fund fees of 1.5% and policy charges of another 1.25%. This is another 2.75% of charges annually in addition to the commissions paid! Read the fine print and know all of what you’re being charged. Good professionals deserve to get paid, but their goal should be to have more of your money working for you, not the other way around.

Posted on Apr 19th, 2013
by author: sraskie.

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Posted in: fee-only, fiduciary, financial planning, investing, investment, life insurance, retirement plan, saving.
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Last-Minute Tax Tips

Apr 15th, 2013
by jblankenship.
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Deadline

Since today is D-Day for income tax filing, I’ve pulled together a few recent tips that the IRS published.  These tips cover a few of the areas that you may find interesting, including how to get a six-month extension for your filing (but not for payment of tax), errors to avoid as you complete your tax return, how to make IRA contributions, and tips for the self-employed at tax time.  This is a much longer post than I normally write, but I think it has a lot of very good and very timely information that will be useful today.

The actual text of these tips are listed below, with the reference number of each tip.

 

IRS Newswire IR-2013-38

Can’t File by April 15? Use Free File to Get a Six-Month Extension; E-Pay and Payment Agreement Options Available to People Who Owe Tax

WASHINGTON – The Internal Revenue Service today reminded taxpayers that quick and easy solutions are available if they can’t file their returns on time, and they can even request relief online.

The IRS says don’t panic.  Tax-filing extensions are available to taxpayers who need more time to finish their returns.  Remember, this is an extension of time to file; not an extension of time to pay.  However, taxpayers who are having trouble paying what they owe may qualify for payment plans and other relief.

Either way, taxpayers will avoid stiff penalties if they file either a regular income tax return or a request for a tax-filing extension by this year’s April 15 deadline.  Taxpayers should file, even if they can’t pay the full amount due.  Here are further details on the options available.

More Time to File

People who haven’t finished filling out their return can get an automatic six-month extension.  The fastest and easiest way to get the extra time is through the Free File link on IRS.gov.  In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an automatic tax-filing extension on form 4868.

Filing this form gives taxpayers until Oct. 15 to file a return.  To get the extension, taxpayers must estimate their tax liability on this form and should also pay any amount due.

By properly filing this form, a taxpayer will avoid the late-filing penalty, normally five percent per month based on the unpaid balance, that applies to returns filed after the deadline.  In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 15.  The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Besides Free File, taxpayers can choose to request an extension through a paid tax preparer, using tax-preparation software or by filing a paper Form 4868, available on IRS.gov.  Of the nearly 10.7 million extension forms received by the IRS last year, almost 5.8 million were filed electronically.

Some taxpayers get more time to file without having to ask for it.  These include:

  • Taxpayers abroad.  US citizens and resident aliens who live and work abroad, as well as members of the military on duty outside the US, have until June 17 to file.  Tax payments are still due April 15.
  • Members of the military and others serving in Afghanistan or combat zone localities.  Typically, taxpayers can wait until at least 180 days after they leave the combat zone to file returns and pay any taxes due.  For details, see Extensions of Deadlines in Publication 3, Armed Forces Tax Guide.
  • People affected by certain tornadoes, severe storms, floods and other recent natural disasters.  Currently, parts of Mississippi are covered by a federal disaster declaration, and affected individuals and businesses in these areas have until April 30 to file and pay.

Easy Ways to E-Pay

Taxpayers with a balance due now have several quick and easy ways to electronically pay what they owe.  They include:

  • Electronic Federal Tax Payment System (EFTPS).  This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online.  To enroll or for more information, call 800-316-6541 or visit www.eftps.gov.
  • Electronic funds withdrawal.  E-file and e-pay in a single step.
  • Credit or debit card.  Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors.  Though the IRS does not charge a fee for this service, the card processors do.  For taxpayers who itemize their deductions, these convenience fees can be claimed on Schedule A Line 23.

Taxpayers who choose to pay by check or money order should make the payment out to the “United States Treasury”.  Write “2012 Form 1040”, name, address, daytime phone number and Social Security number on the front of the check or money order.  To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.

More Time to Pay

Taxpayers who have finished their returns should file by the regular April 15 deadline, even if they can’t pay the full amount due.  In many cases, those struggling with unpaid taxes qualify for one of several relief programs, including the following:

  • Most people can set up a payment agreement with the IRS on line in a matter of minutes.  Those who owe $50,000 or less in combined tax, penalties and interest can use the Online Payment Agreement to set up a monthly payment agreement for up to 72 months.  Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS.  With the Online Payment Agreement, no paperwork is required, there is no need to call, write or visit the IRS and qualified taxpayers can avoid the filing of a Notice of Federal Tax Lien if one was not previously filed.  Alternatively, taxpayers can request a payment agreement by filing Form 9465.  This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice.
  • Some struggling taxpayers may qualify for an offer-in-compromise.  This is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.  The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.  To help determine eligibility, use the Offer In Compromise Pre-Qualifier, a free online tool available on IRS.gov.

 

IRS Tax Tip 2013-52

Five Things to Know if You Need More Time to File

The April 15 tax-filing deadline is fast approaching.  Some taxpayers may find that they need more time to file their tax returns.  If you need extra time, you can get an automatic six-month extension from the IRS.

Here are five important things you need to know about filing an extension:

  1. Extra time fo file is not extra time to pay.  You may request an extension of time to file your federal tax return to get an extra six months to file, until Oct. 15.  Although an extension will give you an extra six months to get your tax return to the IRS, it does not extend the time you have to pay any tax you owe.  You will owe interest on any amount not paid by the April 15 deadline.  You may also owe a penalty for failing to pay on time.
  2. File on time even if you can’t pay.  If you complete your return but you can’t pay the full amount due, do not request an extension.  File your return on time and pay as much as you can.  You should pay the balance as soon as possible to minimize penalty and interest charges.  If you need more time to pay, you can apply for a payment plan using the Online Payment Agreement tool on IRS.gov.  You can also send Form 9465,Installment Agreement Request, with your return.  If you are unable to make payments because of a financial hardship, the IRS will work with you.  Call the IRS at 800-829-1040 to discuss your options.
  3. Use Free File to request an extension.  Everyone can use IRS Free File to e-file their extension request.  Free File is available exclusively through the IRS.gov website.  You must e-file the request by midnight on April 15.  If you e-file your extension request, the IRS will acknowledge receipt of your request.
  4. Use Form 4868 if you file a paper form.  You can request an extension of time to file by submitting Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return.  You must submit this form to the IRS by April 15.  Form 4868 is available on IRS.gov.
  5. Electronic funds withdrawal.  If you e-file an extension request, you can also pay any balance due by authorizing an electronic funds withdrawal from a checking or savings account.  To do this you will need your bank routing and account numbers.

 

IRS Tax Tip 2013-51

Eight Tax-Time Errors to Avoid

If you make a mistake on your tax return, it usually takes the IRS longer to process it.  The IRS may have to contact you about that mistake before your return is processed. This will delay the receipt of your tax refund.

The IRS reminds filers that e-filing their tax return greatly lowers the chance of errors.  In fact, taxpayers are about twenty times more likely to make a mistake on their return if they file a paper return instead of e-filing their return.

Here are eight common errors to avoid.

  1. Wrong or missing Social Security numbers.  Be sure you enter SSNs for yourself and others on your tax return exactly as they are on the Social Security cards.
  2. Names wrong or misspelled.  Be sure you enter names of all individuals on your tax return exactly as they are on their Social Security cards.
  3. Filing status errors.  Choose the right filing status.  There are five filing statuses:  Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) With Dependent Child.  See Publication 501, Exemptions, Standard Deduction and Filing Information, to help you choose the right one.  E-filing your tax return will also help you choose the right filing status.
  4. Math mistakes.  If you file a paper tax return, double check the math.  If you e-file, the software does the math for you.  For example, if your Social Security benefits are taxable, check to ensure you figured the taxable portion correctly.
  5. Errors in figuring credits, deductions.  Take your time and read the instructions in your tax booklet carefully.  Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit and the standard deduction.  For example, if you are age 65 or older or blind check to make sure you claim the correct, larger standard deduction amount.
  6. Wrong bank account numbers.  Direct deposit is the fast, easy and safe way to receive your tax refund.  Make sure you enter your bank routing and account numbers correctly.
  7. Forms not signed, dated.  An unsigned tax return is like an unsigned check – it’s invalid.  Remember both spouses must sign a joint return.
  8. Electronic signature errors.  If you e-file your tax return, you will sign the return electronically using a Personal Identification Number.  For Security purposes, the software will ask you to enter the Adjusted Gross Income from your originally-filed 2011 federal tax return.  Do not use the AGI amount from an amended 2011 return or an AGI provided to you if the IRS corrected your return.  You may also use last year’s PIN if you e-filed last year and remember your PIN.

 

IRS Tax Tip 2013-50

Top Ten Tips on Making IRA Contributions

The IRS has 10 important tips for you about setting aside money for your retirement in an Individual Retirement Arrangement.

  1. You must be under age 70½ at the end of the tax year in order to contribute to a traditional IRA.
  2. You must have taxable compensation to contribute to an IRA.  This includes income from wages, salaries, tips, commissions and bonuses.  It also includes net income from self-employment.  If you file a joint return, generally only one spouse needs to have taxable compensation.
  3. You can contribute to your traditional IRA at any time during the year.  You must make all contributions by the de date for filing your tax return.  This due date does not include extensions.  For most people this means you must contribute for 2012 by April 15, 2013.  If you contribute between Jan. 1 and April 15, you should contact your IRA plan sponsor to make sure they apply it to the right year.
  4. For 2012, the most you can contribute to your IRA is the smaller of either your taxable compensation for the year or $5,000.  If you were 50 or older at the end of 2012 the maximum amount increases to $6,000.
  5. Generally, you will not pay income tax on the funds in your traditional IRA until you begin taking distributions from it.
  6. You may be able to deduct some or all of your contributions to your traditional IRA.
  7. Use the worksheets in the instructions for either Form 1040A or Form 1040 to figure the amount of your contributions that you can deduct.
  8. You may also qualify for the Savers Credit, formally known as the Retirement Savings Contributions Credit.  The credit can reduce your taxes up to $1,000 (up to $2,000 if filing jointly).  Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the Saver’s Credit.
  9. You must file either Form 1040A or Form 1040 to deduct your IRA contribution or to claim the Saver’s Credit.
  10. See Publication 590, Individual Retirement Arrangements, for more about IRA contributions.

 

IRS Tax Tip 2013-46

Top Six Tax Tips for the Self-Employed

When your are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business.  Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

  1. Self-employment income can include pay that you receive for part-time work you do out of your home.  This could include income you earn in addition to your regular job.
  2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.
  3. If you are self-employed, you generally have to pay self-employment tax as well as income tax.  Self-employment ax includes Social Security and Medicare taxes.  You figure this tax using Schedule SE, Self-Employment tax.
  4. If you are self-employed you may have to make estimated tax payments.  People typically make estimated tax payments to pay taxes on income that is not subject to withholding.  If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return.  The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.
  5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business.  You can deduct most business expenses in full, but some costs must be ‘capitalized’.  This means you can deduct a portion of the expense each year over a period of years.
  6. You may deduct only the costs that are both ordinary and necessary.  An ordinary expense is one that is common and accepted in your industry.  A necessary expense is one that is helpful and appropriate for your trade or business.

For more information, visit the Small Business and Self-Employed Tax Center on the IRS website.  There are three IRS publications that will also help you.  See Publications 334, Tax Guide for Small Business; 535, Business Expenses and 505, Tax Withholding and Estimated Tax.  All tax forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Apr 15th, 2013
by author: jblankenship.

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Posted in: 2012 tax year, employer plan, income tax, IRA, irs.
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Estimated Tax Payments

Apr 11th, 2013
by jblankenship.
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When you have income from sources other than traditional employment, it often becomes necessary to make Estimated Tax payments since you don’t have withholding (as you would from traditional wages).  This income may be from self-employment, rents or royalties, or from interest and dividends from your investments.  Income of this variety may also be from pensions, Social Security, and IRAs or qualified retirement plans.

Sometimes you can set up the payments from various sources to withhold tax payments and the provider will then send the withheld tax to the IRS on your behalf.  These tax payments will be reported to you on your 1099R, SSA-1099, and/or other specific tax documents that you receive at the end of the year.  If you don’t have another form of withholding, you may need to make estimated tax payments throughout the year.

The IRS recently issued their Tax Tip 2013-49, which details Six Tips on Making Estimated Tax Payments.  The actual text of the Tip is listed below.

Six Tips on Making Estimated Tax Payments

Some taxpayers may need to make estimated tax payments during the year.  The type of income you receive determines whether you must pay estimated taxes.  Here are six tips from the IRS about making estimated tax payments. 

  1. If you do not have taxes withheld from your income, you may need to make estimated tax payments.  This may apply if you have income such as self-employment, interest, dividends or capital gains.  It could also apply if you do not have enough taxes withheld from your wages.  If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.
  2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return.  Other rules apply, and special rules apply to farmers and fishermen.
  3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year.  You shold also include any tax deductions and credits that you will be eligible to claim.  Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes.  Try to make your estimaes as accurate as possible.
  4. You normally make estimated tax payments four times a year.  The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.
  5. You should use Form 1040-ES, Estimated Tax for individuals, to figure your estimated tax.
  6. You may pay online or by phone.  You may also pay by check or money order, or by credit or debit card.  You’ll find more information about your payment options in the Form 1040-ES instructions.  Also, check out the Electronic Payment Options Home Page at IRS.gov.  If you mail your payments to the RIS, you should use the payment vouchers that come with Form 1040-ES.

For more information about estimated taxes, see Publication 505, Tax Withholding and Estimated Tax.  Forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

jb Note: Another way to ensure that you have appropriate withholding for the tax year is by taking a distribution from an IRA and having tax withheld from the distribution.  This is a little-known option that you can use to avoid having to make quarterly estimated tax payments throughout the year – see the article “IRA Trick – Eliminate Quarterly Estimated Tax Payments” for more details.

Posted on Apr 11th, 2013
by author: jblankenship.

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Posted in: 2013 tax year, estimated tax, income tax, irs.
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What Income is Taxable?

Apr 10th, 2013
by jblankenship.
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It may be tough to figure out which parts of your income you’ve received over the year are taxable, and what parts are not taxable.  This is because certain kinds of income may seem like they should not be taxed (but they are), while other items of income seem like they should be taxed (but they’re not).

The IRS has published a Tax Tip to help understand which income is taxable and which is not.  The complete text of IRS Tax Tip 2013-12 is detailed below.

Taxable and Nontaxable Income

Most types of income are taxable, but some are not.  Income can include money, property or services that you receive.  Here are some examples of income that are usually not taxable:

  • Child support payments;
  • Gifts, bequests and inheritances;
  • Welfare benefits;
  • Damage awards for physical injury or sickness;
  • Cash rebates from a dealer or manufacturer for an item you buy; and
  • Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions.  Examples include:

  • Life insurance proceeds paid to you because of an insured person’s death are usually not taxable.  However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income you get from a qualified scholarship is normally not taxable.  Amounts you use for certain costs, such as tuition and required course books, are not taxable.  However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it.  This includes non-cash income from bartering – the exchange of property or services.  Both parties must include the fair market value of goods or services received as income on their tax return.

If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount.  If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you.  That agency may have made the form available only in an electronic format.  You will need to get instructions from the agency to retrieve this document.  Report any taxable refund you received even if you did not receive Form 1099-G*.

For more information and examples, see Publication 525, Taxable and Nontaxable Income.  The booklet is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

* jb Note: If you didn’t itemize your deductions on the previous year’s return and/or if you did not deduct state or local income taxes on the previous year’s return, your refund is likely not taxable income.  An example would be if you took the state & local sales tax deduction instead of state & local income taxes (you have to choose between the two) – in this case if you received a refund from the state or local taxing authority, this is usually not taxable in the current year.

Posted on Apr 10th, 2013
by author: jblankenship.

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Posted in: 2013 tax year, income tax, irs, taxable compensation.
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What You Need to Know About the Alternative Minimum Tax (AMT)

Apr 8th, 2013
by jblankenship.
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alternativeWhen you have high taxable income and certain deductions and exclusions from income, you may be subject to the Alternative Minimum Tax, or AMT.  This is a nearly flat-tax, which excludes a higher amount of income from the regular income tax.  For 2012 taxes, the exclusion of income is $50,600 for singles, and $78,750 for married couples.  The “nearly flat” tax rate starts at 26% and the upper end rate is 28%.

Under the AMT, no deduction is allowed for the standard deduction, or for personal exemptions.  State and local taxes are also not allowed to be deducted from your income.  Your other itemized deductions are allowed, at least to a certain extent.

Recently the IRS issued their Tax Tip 2013-17, which lists Five Facts to Know About AMT.  The actual text of this Tip is below.

Five Facts to Know about AMT

The Alternative Minimum Tax may apply to you if your income is above a certain amount.  Here are five facts the IRS wants you to know about the AMT:

  1. You may have to pay the tax if your taxable income plus certain adjustments is more than the AMT exemption amount for your filing status.
  2. The 2012 AMT exemption amounts for each filing status are:
    • Single and Head of Household = $50,600;
    • Married Filing Joint and Qualifying Widow(er) = $78,750; and
    • Married Filing Separate = $39,375.
  3. AMT attempts to ensure that some individuals and corporations who claim certain exclusions, tax deductions and tax credits pay a minimum amount of tax.
  4. You should use IRS e-file to prepare and file your tax return.  You figure AMT using different rules than those you use to figure your regular income tax.  IRS e-file software will determine if you owe AMT, and if you do, it will figure the tax for your.
  5. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.

Visit IRS.gov for more information about AMT.  You should also check Form 6251, Alternative Minimum Tax – Individuals and its instructions.  Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Apr 8th, 2013
by author: jblankenship.

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Posted in: alternative minimum tax, income tax, irs.
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A Few Facts to Know About Retirement Plan Contributions

Apr 5th, 2013
by jblankenship.
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Deadline

As we near the tax filing deadline, there are a few things you need to be aware of as you consider your retirement plan contributions for tax year 2012 (or whatever the prior tax year is, if you’re reading this sometime later).

Regular IRA contributions are due by the filing deadline, with no extensions. That means April 15, 2013 for the 2012 tax year. Your contribution for 2012 is considered made “on time” if your payment is postmarked by midnight on April 15, 2013.

Perhaps you wish to make a more substantial contribution to a retirement plan – in 2012, you can contribute up to $50,000 to a Keogh plan. That amount is limited to 20% of the net self-employment income, or 25% of wage income if the individual is an employee of the business. Keogh plan contributions can be made by the extended due date of your return – in most cases this is October 15, 2013 (for tax year 2012). The downside is that you must have established the Keogh plan by December 31, 2012 in order to make contributions for the 2012 tax year. If you have not established your Keogh plan yet, it’s too late for tax year 2012.

However, you still have another option if you want to make significant retirement plan contributions (above and beyond the $5,000/$6,000 limit on traditional IRAs) – and this is to establish and fund a SEP-IRA. The funding limit for SEP-IRAs is the same as for Keogh plans, but you can establish the SEP-IRA as late as the extended filing date (October 15) and fund it for the prior tax year.

Happy saving!

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Posted on Apr 5th, 2013
by author: jblankenship.

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Posted in: 2012 tax year, Annual limits, IRA, qrp, retirement accounts.
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The ABC’s (and D’s) of Medicare

Mar 29th, 2013
by sraskie.
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images

With more and more baby boomers retiring, more and more people including the Boomers, and their children and families are going to have questions and concerns about Medicare. Questions can range from what Medicare is, what it does, what it doesn’t do, and the nuances that make up our nation’s health care for retirees.

Medicare was created in 1965 by the Social Security Act and was signed into law by Lyndon Johnson.

Currently, Medicare is funded via taxation and premiums paid by Medicare subscriber. Part A – which we will cover in a future article, is funded by a 2.9% tax on wages. Unlike Social Security tax that has a limit or cap on the amount of income that can be taxed ($110,100 in 2012 and $113,700 in 2013), Medicare has no such wage base. The 2.9% tax is on an unlimited amount of earnings.

Eligibility for Medicare typically starts for those who turn age 65 and are permanent citizens of the US. Persons are automatically enrolled at age 65 if they have yet to start collecting Social Security. Persons electing to receive Social Security benefits before their full retirement age (FRA), must enroll manually in Medicare at age 65. Persons can also be eligible for Medicare based on having a disability covered under Social Security for 24 months, end-stage renal failure (requiring dialysis), and amyotrophic lateral sclerosis (ALS – Lou Gehrig’s Disease). Finally, Medicare is available for covered railroad workers receiving Railroad benefits.

According to Medicare.gov, enrollment is set to hit 78 million people by 2030 – as the majority of baby-boomers will be enrolled.

Medicare is broken down into three parts: A, B and D. Wait a second. Didn’t we skip a letter? Yes. We’ll talk about Part C or Medicare Advantage a little later on. Next time, we’ll talk about Part A.

Posted on Mar 29th, 2013
by author: sraskie.

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Posted in: baby boomers, benefit, health insurance, health plans, Medicare, medicare, medicare costs, medicare part b, medicare part b premiums.

How an IRA is Treated When a Beneficiary Dies

Mar 27th, 2013
by jblankenship.
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Treats Truck

When an IRA owner dies while the IRA still has funds in it, the primary beneficiary(ies) have the opportunity to transfer the account to an inherited IRA and begin taking the Required Minimum Distributions (RMDs) over his or her lifetime. When this primary beneficiary dies, it can be difficult to figure out who the money goes to. This is known as the successor beneficiary.

It’s important to know the difference between a successor beneficiary and a contingent beneficiary. A contingent beneficiary takes the place of the primary beneficiary in the event that the primary beneficiary dies before the original owner does. A successor, on the other hand, takes the place of the primary beneficiary when the primary beneficiary outlives the original owner. So it’s a matter of timing. What we’re interested in is the successor beneficiary.

There are four main ways that a successor beneficiary is determined:

  • Successor is named by the primary beneficiary. When the inherited IRA is established, the primary beneficiary has the opportunity to name one or more beneficiaries of the inherited IRA, along with contingent beneficiaries if desired.
  • Successor is the primary beneficiary’s estate. If the primary beneficiary hasn’t designated a beneficiary of the inherited IRA, the primary beneficiary’s estate becomes the successor beneficiary of the IRA.
  • Custodial documents name a successor beneficiary. Some IRA custodians provide for the designation of a successor beneficiary in the original plan documents. This is relatively rare, and even more rare that a successor is actually named.
  • Original owner names a successor beneficiary. Sometimes the original owner has had the foresight to utilize a trust document of some variety to control succession among beneficiaries. In a case like this, the trust is the primary beneficiary, and the trust has a primary beneficiary and successor beneficiary(ies).

Below is a flowchart which describes how the ownership of an IRA flows to different beneficiaries. (click on the chart to see a larger view)

ira transition flowchart

Distribution for the Successor Beneficiary

So, having sorted out that we are working with the appropriate successor beneficiary, we need to determine what is the proper distribution period for the successor beneficiary. As we know, if the IRA is an inherited IRA, it is subject to Required Minimum Distributions, over a period determined by the beneficiary’s age at the time of the death of the original owner. This figure is determined from Table I in the first year of distribution (the year after the death of the original owner), and is a set period of time. The factor from Table I is used in the first year, and each subsequent year one is subtracted from the first factor and the IRA is distributed based on that amount.

So, for example, if the beneficiary is 71 years of age in the first year of distribution, according to Table I the factor is 16.3. The IRA value is divided by 16.3 to come up with the RMD for the first year. Each subsequent year 1 is subtracted from the Table I factor, so that the IRA is distributed over 16.3 years. This is known as the Applicable Distribution Period, or ADP.

When a successor beneficiary takes over to receive distributions from the inherited IRA, the original ADP is still in effect, and the IRA must be distributed over that remaining period to the successor beneficiary(ies).

Complications

Several factors can add a considerable degree of complication to the process – such as if there are multiple primary beneficiaries and/or multiple successor beneficiaries.

Each primary beneficiary is treated separately, and the successors for each (unless determined by the original plan as mentioned above) are determined by the individual beneficiary. When there are multiple successors, each one is treated separately and the original ADP for the applicable primary beneficiary applies to all successors pro rata for the successor’s share.

Another complication is when one or more beneficiaries disclaims the inheritance. In a case like that, first it is determined whether the original beneficiary designation had pre-determined the successor for each primary beneficiary (such as “per stirpes”, meaning that the heirs of the original beneficiary are bequeathed the disclaimed share). In the absence of this sort of designation, the other beneficiaries in the primary class take over the disclaimed share.

Of course in the real world there are many, many more complications, but this should give you a place to start. Use the comments section below to bring in your more complex situations and we’ll work them out.

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Posted on Mar 27th, 2013
by author: jblankenship.

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Posted in: inherited IRA, IRA.
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Capital Gains and Losses on Your Tax Return

Mar 25th, 2013
by jblankenship.
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Afon Gain and Pont Y Gain

When you sell things, including stocks, bonds, real estate, collectibles, and other items, you may either gain money or lose money from the original purchase price.  This gain or loss is known as a capital gain or capital loss, and (with some exceptions) you will report these capital gains or losses on your income tax return.

Often the gains are afforded special tax rates and treatment, and the losses provide additional benefits as well.  This entire area of tax reporting can be confusing and there are special rules that you need to follow in order to make sure that you report these transactions correctly and pay the appropriate taxes.

The IRS recently published their Tax Tip 2013-28, which details Ten Facts about Capital Gains and Losses.  The actual text of the Tip is below:

Ten Facts about Capital Gains and Losses

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes.  A capital gain or loss occurs when you sell a capital asset.

Here are 10 facts from the IRS on capital gains and losses:

  1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.  Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.
  2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it.  Your basis is usually what you paid for the asset.
  3. You must include all capital gains in your income.
  4. You may deduct capital losses on the sale of investment property.  You cannot deduct losses on the sale of personal-use property.
  5. Capital gains and losses are long-term or short-term, depending on how long you hold on to the property.  If you hold the property more than one year, your capital gains or loss is long-term.  If you hold it for one year or less, the gain or loss is short-term.
  6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain.  If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain’.
  7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income.  The maximum capital gains rate for most people in 2012 is 15 percent.  For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains.  Rates of 25 or 28 percent can also apply to special types of net capital gains.
  8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return.  The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.
  9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return.  You will treat those losses as if they occurred that year.
    (jb note: In other words, your carried over loss from a prior year is subtracted from your gains or added to the losses in the current year.  If the result is a net capital loss, up to $3,000 is deducted from your ordinary income in that year, and the excess amount carried over to the next year.  If the result is a net capital gain, this net gain is reported and taxed as a long-term gain on the current return.)
  10. Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses.  You will carry over the subtotals from this form to Schedule D, Capital Gains and Losses.  If you e-file your tax return, the software will do this for you.

For more information about capital gains and losses, see the Schedule D instructions or Publication 550, Investment Income and Expenses.  They are both available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Posted on Mar 25th, 2013
by author: jblankenship.

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Posted in: capital gains and losses, capital gains tax rates, income tax.
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Computing Your Social Security Monthly Benefit

Mar 22nd, 2013
by jblankenship.
5 comments
Calculator

When planning for Social Security retirement benefits, it is important to know how to compute the amount of your benefit at various ages.  The amount of your benefit will be different depending upon your age when you begin drawing the benefit, as well as your record of earnings over time.

Below are the factors that are needed in order to determine the amount of your Social Security benefit:

  • Your Primary Insurance Amount, or PIA
  • Your Full Retirement Age, or FRA, which is determined by your year of birth
  • Your age when you will begin drawing benefits
  • Whether or not the Windfall Elimination Provision (WEP) applies to your benefits

This earlier article has information about the PIA, and you can find your PIA on your Social Security statement.  Your FRA, if you were born between 1943 and 1954, is 66.  If you were born in 1955 or after, FRA gradually increases up to 67 by birth year of 1960 or later.

So with these first two factors, we can construct the initial part of the monthly benefit equation.  If you begin receiving benefits in the month that you reach FRA, your benefit is equal to your PIA (although this could be reduced by WEP if it applies, see below).  If you are intending to begin benefits before FRA, there will be a reduction from your PIA.  On the other hand, if you begin benefits after FRA, the amount of your benefit will be increased from your PIA.

Prior to FRA

If starting to receive benefits prior to FRA, you need to calculate the number of months prior to FRA that you’ll begin.  If it’s less than 36 months prior to FRA, take the number of months times 5/9 of a percent.  This will give you the amount of reduction.  For example, if you were starting your benefit 24 months before FRA, the calculation is:

24 * 5/9% = 120/9% = 13 3/9%, or 13.333%

If, on the other hand, you are starting your benefit more than 36 months prior to FRA, the calculation becomes more complicated.  For every month greater than 36 prior to FRA, you multiply by 5/12 of a percent, and then add 20% (36 * 5/9%) to that figure to come up with the total reduction.  So, for example, if you were starting your benefit 43 months before FRA, the calculation goes as follows:

43 minus 36 = 7

7 * 5/12% = 35/12% = 2 11/12%, or 2.9167%

20% plus 2.9167% = 22.9167%

Both of these factors are reductions, so you will subtract the factor from 100%, and multiply this by your PIA to come up with your monthly benefit amount.  From the first example, if your PIA was $2,000, the reduced benefit amount would work out to $1,733, since 100% minus 13.333% equals 86.667%.  Multiplying $2,000 by 86.667% equals $1,733.

For the second example, again using a $2,000 PIA, your benefit would be calculated as follows: 100% minus 22.9167% equals 77.0833%, times $2,000 equals $1,542.

This is your monthly benefit amount if you start benefits before FRA and the WEP doesn’t apply.  If the WEP applies to you, skip down to the section on the Windfall Elimination Provision.

After FRA

Much like the calculation for starting benefits before FRA, the calculation for starting benefits after FRA is based upon the number of months relative to FRA.  So you need to figure out how many months after FRA you are intending to begin your benefit.  For each month after FRA to the start of your benefits, up to age 70, your benefit is increased by 2/3 of a percent from your PIA. (This factor has been different in past years, but for now this is the applicable figure.)

If you wait until two and a half years after FRA to begin your benefits, this is equal to 30 months.  So the calculation for the increase is as follows:

30 * 2/3% = 60/3% = 20%

Since this is an increase over PIA, add the factor to 100%, and multiply by your PIA to come up with the monthly benefit amount.  From our example earlier, your PIA is $2,000, and you have delayed 30 months (2 1/2 years) after FRA to begin your benefit.  Multiply $2,000 by 120%, and you come up with a benefit amount of $2,400.

This is your monthly benefit amount if you have delayed receiving your benefit after FRA, unless the Windfall Elimination Provision (WEP) applies.  Keep reading for how the WEP can impact your benefit.

Windfall Elimination Provision (WEP)

If you are (or will be) receiving a pension from a job that was not covered by Social Security (e.g., a government job or a job overseas), the Windfall Elimination Provision, or WEP, will further reduce your monthly benefit amount.  See the article at the link for how the Windfall Elimination Provision is calculated.

What is important to know is that the maximum amount that the WEP can reduce your benefit (for 2013) is $395.  So if the WEP impacts you to the maximum extent, your monthly benefit amount that we calculated earlier will be reduced by $395 in 2013 – and this figure is adjusted annually by the normal Cost-of-Living Adjustments (COLAs) that are applied each year.  See this article (at the link) for information on how the WEP can be reduced or eliminated.

So that’s it – follow the above steps and you have a good idea of what your monthly benefit amount will be.  Happy calculating!

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Posted on Mar 22nd, 2013
by author: jblankenship.

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Posted in: primary insurance amount, Social Security, social security benefits.
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Adoption Credit for Tax Year 2012 and beyond

Mar 18th, 2013
by jblankenship.
1 comment
Adoption

As you probably already know if you’re in the position to seek the adoption credit, this credit has undergone some changes for the 2012 filing season.

In the past, for tax years 2010 and 2011, the adoption credit was a refundable credit – meaning that you could receive the entire credit regardless of the amount of tax you have to pay.  For example, if you had $10,000 of adoption credit and your tax return otherwise indicates that your tax is $6,000, you were able to claim the entire credit and $4,000 would be refunded to you.  This was in addition to any overpayment you may have made on your withholding.

However, for 2012 (and beyond, unless the rules change again) the adoption credit is back to being non-refundable.  Now, in the situation described above, the maximum amount of credit that you could claim is equal to your tax, or $6,000.

The limit for adoption expenses for 2012 is $12,650 per child.  A portion of these expenses could have been incurred in a prior year, and the credit claimed for that tax year.  The total of all credits for the adoption of that child (including prior years’ credit) cannot exceed $12,650 if the adoption was finalized in 2012. Any excess credit cannot be carried over to future years.

There is also an income limit for the credit: if your Modified Adjusted Gross Income is less than $189,710 for 2012, the credit is not limited.  If your income is above that level but less than $229,710, the maximum credit is reduced pro rata from $12,650.  Above a MAGI of $229,710, the credit is eliminated.

It’s important to note that there is also an income exclusion limit for employer-provided adoption benefits – which is also equal to $12,650 per child for 2012.  This exclusion has the same MAGI limits as the credit.  Credit and exclusion can be taken for the same adoption, but not for the same expenses.

For example, if you had a adoption expenses of $18,000 for tax year 2012 and your employer provided you with adoption assistance of $10,000 for the year, you would only be able to take the credit for $8,000 (the remaining expenses).

Lastly, the adoption credit is claimed on Form 8839, Qualified Adoption Expenses.  When using this form to claim adoption credit, you are not allowed to efile your return, it must be printed and filed by mail.  However, you do not have to send along the supporting documents and adoption decree (as you did in 2010 and 2011), since the credit is no longer refundable.

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Posted on Mar 18th, 2013
by author: jblankenship.

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Posted in: #noTOP, 2012 tax year, 2013 tax year, income tax, income tax credit, tax credits.
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Restricted Application is Available via the Online Application

Mar 15th, 2013
by jblankenship.
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I learn something new almost every day.

Today (well, not today but recently), I learned something about the online application for Social Security that I didn’t know: the restricted application for Spousal Benefits is available as a choice when you apply using the online application system! (If you want more information on why a restricted application is important, see this article about Leaving Money on the Table.)

For quite a while now I’ve been telling folks that the best way to apply for the restricted application is to go to your local office.  When you get there and explain that you want to submit a restricted application for Spousal Benefits only, the first person that you talk to will likely tell you that you can’t do this, because your own retirement benefit is greater than half of your spouse’s PIA, or something like that.  Then my advice has been to ask for a supervisor and explain it again, and keep insisting that you’re eligible to do this (make sure that you are, first of course!), until you get the right person to agree with you.

As it turns out, for some time now you’ve been able to select this option via that online application.  See below – this is a screenshot of the application system (sorry it’s not very legible).  The last part in bold says:

If you are eligible for both retirement benefits and spouse’s benefits, do you want to delay receipt of retirement benefits?

bene app screenshot restricted app

It’s clear that this option gives you the ability to delay the receipt of your retirement benefit and only receive the spouse’s benefit, assuming that you’re at least at Full Retirement Age and your spouse has applied for his or her benefit.

This is great news – since now you won’t have to go through the hassle described above in order to submit a restricted application for spousal benefits.

An additional, likely unintended positive to this development is that you could use this blog to show the first person you talk to (if you still opt to visit the local office) in order to help prove your eligibility for this option.

Posted on Mar 15th, 2013
by author: jblankenship.

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Posted in: #noTOP, restricted application, Social Security, social security administration, social security benefits, Social Security spousal benefit, Spousal Benefit.
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Your Employer’s Retirement Plan

Mar 13th, 2013
by sraskie.
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Backcountry Provisions

Whether you work as a doctor, teacher, office administrator, attorney, or government employee chances are you have access to your employer’s retirement plan such as a 401(k), 403(b), 457, SEP, or SIMPLE. These plans are a great resource to save money into, and some employers will even pay you to participate!

Let’s start with the 401(k). A 401(k) is a savings plan that is started by your employer to encourage both owners of the business and employees to save for retirement. Depending on how much you want to save, you can choose to have a specific dollar amount or percentage of your gross pay directed to your 401(k) account. Your money in your account can be invested tax-deferred in stock or bond mutual funds, company stock (if you work for a publicly traded company), or even a money market account. Your choice of funds will depend on the company that offers the 401(k) through your employer. Generally, you’re going to want to choose funds with low fees and expenses. As of 2013, the maximum amount you can put into your 401(k) is $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older. At age 59 ½ qualified withdrawals are now taxed as ordinary income. Withdrawals before age 59 ½ are subject to penalties with some exceptions.

A cousin to the 401(k) is the 403(b). The 403(b) is very similar to the 401(k) in that you’re allowed to allocate a certain amount or percentage of your gross pay to your account, tax-deferred. Where the 403(b) differs is that it’s only allowed for non-profits such as school districts, hospitals, municipalities, and qualified charitable organizations. Another difference is by law the money in your 403(b) can only be invested in mutual funds or annuity contracts. You’re not allowed to own individual stocks or bonds in it. Like the 401(k), you’re allowed to save (as of 2013) $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older. At age 59 ½ qualified withdrawals are now taxed as ordinary income. Withdrawals before age 59 ½ are subject to penalties with some exceptions.

Branching out in our retirement plan family tree we come to the 457 plan. 457 plans are reserved for certain non-profits such as hospitals, government entities, school districts and colleges and universities. As you may have guessed, 457 plans are similar to their 401(k) and 403(b) counterparts in that money from your gross pay goes into your account tax-deferred. Like the 403(b) the 457 only allows investments in mutual funds or annuity contracts.

Similar to the 401(k) and 403(b), you’re allowed to save up to $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older (for 2013). Unlike the 401(k) and 403(b) the 457 allows you access to your money at any age, as long as you’re separated from service from your employer. For example, if you were 40 years old and have been saving into a 457 since you were age 25 and you saved $50,000 and you were fired, laid off or resigned, you’d have access to your 457 money without penalty; you’d simply pay ordinary income tax on any withdrawals.

Another key point to make is in regards to the aggregation rule. What this means is that you’re only allowed to invest $17,500 (along with the “catch-up” if you qualify) total between a 401(k) and a 403(b). For example, you work as a professor for nine months of the year and save $14,000 in your college’s 403(b). Over the summer, you work part time for a company that offers a 401(k) plan and you want to save money there. Assuming you’re age 40, you’d only be able to save an additional $3,500 to your summer company’s 401(k) – for a total of $17,500.

There is one exception to the aggregation rule. If you have access to a 401(k) or 403(b) and a 457, you are allowed to contribute the maximum to the 401(k) or 403(b) – for a total of $17,500 and then contribute the maximum to the 457 for an annual total of $35,000. The 457 trumps the aggregation rule. Few people may be able to actually sock away $35,000 per year, but it is available to those that work for employers offering both plans or if you work for two or more employers and they offer one or the other.

SEPs and SIMPLEs work a bit different. Typically these plans are available to smaller employers and SEPs are common for those that are self-employed. Both SEPs and SIMPLEs use IRAs as the funding vehicle to place retirement money, but each has different requirements as to contribution limits and participation requirements.

SEPs (Simplified Employee Pensions) can be funded to a maximum of $51,000 annually (for 2013) or 25% of the employee’s salary – whichever is smaller. There can be corresponding tax deductions involved that may be beneficial for solo businesses or businesses with a small number of employees as there are requirements that all employees must participate.

SIMPLEs (Savings Incentive Match PLan for Employees) are another option for smaller businesses looking to start a retirement plan and looking for a cost effective way to start (a 401(k) can be administratively expensive). Essentially, both employer and employees are allowed to participate and certain rules dictate that the employer must make a matching contribution (hence the Match in the name) to participating employees. As of 2013 you can contribute a maximum of $12,000 annually to a SIMPLE plan with an additional “catch-up” contribution of $2,500 if you’re age 50 or older.

The aggregation rule that applies to the 401(k) and 403(b) also applies to SEPs and SIMPLEs. This means that of the four plans for 2013, you’re still only allowed a total contribution of $17,500 annually ($23,000 if you’re age 50 or over). Having a 457 would be the only way to increase this amount.

Like SEPs and SIMPLEs, some 401(k) and 403(b) plans also have the company match. This means that in addition to your contributions, your employer will also make a contribution or “match” to the amount you’re contributing up to a certain percent. Consider taking full advantage of this. It’s free money! There are several reasons why an employer would do this ranging from plan compliance to helping ensure employee satisfaction and loyalty.

Finally, participating in your employer’s plan does not prohibit you from participating in a Traditional or Roth IRA. You are allowed to contribute the maximum allowed by law to both your employer’s plan and your own IRA.

It goes without saying that before you decide to participate, talk with your human resources department (not your cubicle buddy) or a financial professional regarding your options and which option or combination is right for you.

Posted on Mar 13th, 2013
by author: sraskie.

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Posted in: 401 k, 401 k 403 b, 401k, 403 b, 457, employer plan, investing, investment, qualified retirement plan, retirement, retirement accounts, retirement benefits, retirement plan, retirement plans, retirement savings, retirement savings plans, SEP IRA, SIMPLE.

Book Review: Currencies After the Crash

Mar 11th, 2013
by jblankenship.
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You Alone amongst all the Thousands....... m...

This book is a series of nine essays about the state of currency in our global economy after the 2008-2009 economic crisis.  The contributor list is impressive: global currency luminaries such as Anoop Singh of the IMF, Robert Johnson of the Global Finance Project, Jörg Asmussen of the European Central Bank, and many others of similar pedigree.  The book is edited by Sara Eisen of Bloomberg.

This book doesn’t lend itself well to description, other than that each of the contributors provides a snippet of insight into the global currency situation as it stands today, from his or her professional perspective.

Most of the essays point out that the US dollar is not in the crisis situation that the popular press would have us believe.  Yes, the dominance of the dollar has diminished in recent years, but a replacement as dominant currency worldwide is not eminent from either the euro or the yuan, the only two contenders at this point.

That’s not to say that the dollar doesn’t have it’s problems – it’s just that the dominance of the dollar is so huge that it can’t be replaced in the very near term.  And during that period the US has the opportunity to right the ship and possibly maintain the dominance of the dollar.

The euro and the European Central Bank have a slew of problems that must be addressed in order to maintain viability as an economy – including the likely paring down of the membership to eliminate some of the problem child nations such as Greece.  This will likely keep the euro as a minor player on the world stage, still a major component of the western European marketplace.

The yuan’s position as a leading global currency is improving all the time, but China has to begin to evolve its own economy toward a consumer-centric one in order to get to a point where the yuan can begin to assert global dominance.

Of course the views are not in lockstep with one another, so you’ll want to read this through for yourself if you’re looking for a good overall view of the global currency marketplace.

This book may be a bit heady for many readers, as the concepts of global currencies and banking get pretty complex.  I have to admit that I had a difficult time with some of the information presented, as global macroeconomics and banking aren’t really strong areas of interest for me.

If you’re interested in a broad overview of the global currency situation, I highly recommend this book.  You’d have to search far and wide to get this many high-level individuals’ opinions otherwise.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Mar 11th, 2013
by author: jblankenship.

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Social Security Benefits and Taxes

Mar 8th, 2013
by jblankenship.
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Backcountry Provisions

When you’re receiving Social Security benefits, you may be subject to income tax on those benefits.  At the end of the year, you’ll receive a form SSA-1099 from the government that details the benefits that you’ve been paid, as well as the amount that has been deducted for Medicare premiums, and any federal income tax that you’ve had withheld from the benefit checks.

When you prepare your tax return for the year, if you’re using a software program (does anyone prepare them by hand any more?), the program will give you a place to enter the figures from your SSA-1099 form.  Then after you’ve entered all of your other income information into the system, it will calculate how much of your Social Security benefit is subject to income tax.

But that’s no fun, is it?  How do you know how much of your benefit is going to be taxable?

Here’s how it works: there is a figure known as provisional income, which is calculated using all of your other income (including tax-exempt interest) plus half of your Social Security income.  Your provisional income is then compared to a base amount, depending upon your filing status.

  • For filing status of Single, Head of Household, Qualifying Widow(er) with a Dependent Child, or Married Filing Separately (if you did not live with your spouse at any time in the year), the base amount is $25,000
  • Married Filing Jointly, the base amount is $32,000
  • Married Filing Separately (if the spouses lived together at any time during the year), the base amount is $0

If your provisional income is above the base amount for your filing status, your Social Security benefit at least a portion of your benefit is going to be taxable.  Up to 50% of your benefit may be taxable as ordinary income, until you reach the next base level.  If your provisional income is greater than the first base level but less than the next base level, at most 50% of the Social Security benefit will be taxable.  The next base levels are:

  • $34,000 (Single, Head of Household, etc.)
  • $44,000 (Married Filing Jointly)
  • $0 (Married Filing Separately)

When your provisional income is greater than the second base level, a portion of your Social Security benefit will become 85% taxable.  Upon reaching the second level, a portion of the benefit is 50% taxable and the amounts above the second level are 85% taxable.  As your income increases, eventually all of your Social Security benefits become 85% taxable.

If you want more detail on the calculations, you can look at this earlier article which works through the calculations for Social Security benefit taxation.  It gets pretty complicated, but it’s useful to know how it all works, in case you can change your income to make a difference in how the benefits are taxed.  This is also useful as you plan which types of income to recognize – if you can take Roth-type income versus regular IRA income,it can have a profound effect on the taxation of your Social Security benefits.  For more on how this works, see this article on Roth Conversions and Social Security benefits.

Posted on Mar 8th, 2013
by author: jblankenship.

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Posted in: income tax, IRA, Roth Conversion, Social Security, social security benefits.
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Why You Need an Emergency Fund

Mar 6th, 2013
by sraskie.
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You may or may not have heard that it’s wise to have an emergency fund. Even if you’ve heard it, you may not be aware of what it means and why you should have one – and more importantly why you need one. An emergency fund is just that. It’s money set aside for a rainy day, an unexpected bump in the road, or for a real emergency or an expense that you haven’t specifically planned for. Examples of those unexpected expenses (borderline redundant – I know) include a car accident, disability, storm damage to your home, losing a job, being a victim of theft, etc.

So what makes up an emergency fund? Generally, a good place to start is to have a goal of at least 3 to 6 months of non-discretionary living expenses put away in a relatively liquid account such as a savings, checking or money market account. Non-discretionary living expenses are those that do not go away, should you lose your job or the ability to generate income. These expenses would include your mortgage payment, rent, utilities, food, car payment and taxes.

Now comes the easy part.

Simply add up all of your non-discretionary living expenses that you have in a month and multiply by 3 and then multiply by 6. This is the amount you’d need to have set aside. For example, if I have a $1,200 mortgage, $400 in groceries per month, and utilities of $300, I would have a total of $1,900 monthly in expenses. Multiply that number by 3 ($5,700) and again by 6 ($11,400) and it looks like I’d need between $5,700 and $11,400 set aside for my emergency fund.

These amounts are not set in stone. The amount you’ll need will also depend on your job, your income, and how you’re paid. If I’m a tenured college professor making $6,000 monthly, I may only need 3 to 6 months put away. If I’m an executive or CEO of a large company and I make $20,000 monthly, or I’m a commissioned sales person making $10,000 monthly, I may consider having a fund of 9 to 12 months. This would be because there’s a good chance of me not being able to find another job at that income level if I were fired or laid off. And generally, as peoples’ incomes increase, so do their expenses.

Now comes that hard part – actually saving the money.

It’s really not that hard, it just takes a bit of planning and discipline you’ll be well on your way. You can start by putting away a small sum every week or month – depending on what works for you. This could be $50, $100, or even $500 per month until you’ve funded account. If you’re looking for places to find money consider cutting unnecessary expenses until you’ve got your emergency fund at 100%. Reduce your phone bill, cut your cable TV costs, and pack your lunch instead of dining out. Notice a pattern? These are all discretionary expenses – those that can go away if you want them to.

Your emergency fund can also be used in tandem with your insurance deductibles. Let’s say you have low deductibles on your auto insurance and want to save some money. You can simply increase your deductibles and should you need to use your deductible for a claim, you can take from your emergency fund. This is wise especially if you rarely file claims. If you have a disability policy with a 60 day elimination period (time deductible) before benefits start, you can use your emergency fund to help cover the expenses for those 60 days until your benefits begin.

Now that you know what an emergency fund is, it’s important to know what it’s not. It is not a slush fund to buy toys like a new car, boat, TV, etc. It’s not money to play with, gamble with or dip into because “It’s only a couple bucks, it can’t hurt anything.” Those couple of bucks can add up to thousands in no time. Don’t steal from yourself. Resist the temptation to spend it. If you feel you may be the type of person to be tempted, consider putting the money in an account that’s not easy to get to – such as a money market account outside of your city or state. You may also consider having check writing privileges but only on amounts above a certain amount like $250. This can help resist the urge to spend on little things help put a time buffer on when you think you want the money, and when you can actually get it.

One final note is to make sure your emergency fund is not your 401(k), 403(b), traditional or Roth IRA. These are retirement accounts and should stay as such. A properly funded emergency fund will reduce if not eliminate any reliance on premature retirement account distributions.

Now, sit back, relax, and pray you don’t need to use it!

Posted on Mar 6th, 2013
by author: sraskie.

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Posted in: budgeting, credit cards, financial planning, goals, Insurance, IRA, mortgage, mortgage debt, principal residence, retirement savings, saving.

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