Financial advisors commonly advise their clients to seek investments with high returns in order to maximize their retirement funds, but most investors don’t realize that high fees are eating into those earnings.
While fund fees have steadily declined in recent years, many investors don’t realize how much they’re paying in fees to begin with or how much these expenses and other investment costs are eating into their retirement savings. Remember that as your investment returns compound over time, so do the fees, which means your payments could accumulate to 2% or more.
Below are some of those hidden fees and what you can do to avoid them.
This refers to the annual fees charged by all mutual funds, index funds, and exchange-traded funds as a percentage of your investment in the fund. Expense ratios apply to all types of retirement funds, such as your 401(k), individual retirement account, or brokerage account, and they cut a percentage of your investment in the fund depending on its annual yield.
Mutual Fund Transaction Fees
This is a fee you pay a broker to buy and sell some mutual funds on your behalf, similar to a “trade commission” that a broker would charge to buy or sell stock.
These fees surface when a broker successfully sells a fund to you that has a sales charge or commission.
These fees are associated with maintaining your portfolio or brokerage account.
Brokerage Account Inactivity Fees
If your account allows you to buy and trade at any time, you could face an unexpected inactivity charge if you don’t trade for a few months.
To determine whether your retirement fees are too high, check the fee disclosure and look at the expense ratios on the mutual funds you are invested in. Likewise, check these fees before you invest in a mutual fund you are interested in.
To help balance your investment accounts and minimize your retirement fees, take advantage of lower-fee mutual funds if your 401(k) plan already has an expense ratio of over 1%.
Finally, be aware that fees may also be related to how much advice you’re getting and where that advice is coming from. Human advisors are more expensive than robo-advisors, and an actively managed fund will cost more than an index fund or an exchange-traded fund (ETF).
Congress originally designed the Alternative Minimum Tax (AMT) to make sure wealthy taxpayers who take advantage of multiple tax breaks and itemized deductions would still pay their fair share in federal income taxes each year. The AMT produces around $60 billion a year in federal taxes from the top one percent of taxpayers. However, because the AMT wasn’t tied to inflation, the tax has extended down to a growing number of middle-income taxpayers. Here’s what to do about it.
It’s called the Alternative Minimum Tax because it is a mandatory alternative to the standard income tax. If you are a high-income earner, you are required to calculate your taxes twice – once under standard tax rules and again under the stricter AMT rules (the AMT disallows many deductions, such as state and local tax, childcare credits, and property taxes). Ultimately, you are required to pay the higher amount.
Are You at Risk?
First, be aware of the triggers for AMT, as earning a higher income isn’t the only factor. For example, it can also affect those who are married and file jointly, have a large family (more than four dependents), enjoy profits from stock options, or live in a high-tax state. Therefore, any move that reduces your adjusted gross income (AGI) – like upping your contributions to qualified retirement accounts such as IRAs, 401(k)s, and health savings accounts – might help avoid the AMT. Additionally, aim to reduce your itemized deductions and increase your charitable contributions. Finally, pay attention to long-term capital gains – when you sell a home or other investments for a profit. These are taxed at the same rate under both the standard income tax and the AMT, but capital gains could put you over the threshold for AMT, thereby triggering it and disqualifying you from deducting state income taxes paid on the capital gains.
If you practice careful year-round preparation while being mindful of the above triggers, you’ll have a better chance of avoiding the AMT.
Amidst a strengthening labor market, rising economic activity, and a declining unemployment rate, the Federal Open Market Committee (FOMC) decided last month to raise the federal funds rate – the interest rate at which banks and credit unions lend Federal Reserve funds to other banks and credit unions overnight – by a quarter-point, from 1.75 to 2 percent. This is the second increase in 2018, and two more increases were suggested by year’s end.
To the average small business owner, the knee-jerk reaction might be a negative one. After all, interest rates do trickle down, affecting credit card balances, adjustable-rate mortgages, and variable loan rates. But the increase could potentially be good news for small businesses. Higher interest rates amid a strong economy mean more profitable deals for banks, which creates a greater motive to offer more financing options and approve loan requests.
Another potential long-term benefit to higher interest rates is a better cash flow. Because inflation is typically a motivator for rate increases, the cost of goods and services tend to escalate, effectively allowing small businesses to raise prices, improve margins, and enjoy more breathing room.
As with any change in the economy, however, the impact on small businesses could have negative consequences as well. One potential consequence of higher interest rates is the effect on consumerism. Because consumers with credit card debt will be paying higher interest rate charges, they’ll have less disposable income to spend, which could hinder sales and growth of small businesses. Additionally, companies that need to borrow money for growth can potentially incur a higher cost of capital when interest rates go up. This can affect new loans as well as existing loans with floating rates.
Because interest rates have been hovering near zero for the past several years in order to spur the economy, a move in the needle was inevitable, and we are unlikely to see rates that low again anytime soon. With the Federal Reserve’s suggestion of additional increases to come, small businesses that are contemplating applying for loans might want to do so sooner rather than later.
Big Leadership Mindset: How the Practices and Philosophies of the World’s Most Successful Entrepreneurs Can Benefit Small Businesses
Self-made millionaires and billionaires don’t just happen by luck or chance, though sometimes luck and chance play a role. In large part, the world’s leading entrepreneurs demonstrate that innovation, perseverance, and strategic investments – in business and in life – are common denominators for lasting success.
Take Care of Your People and Your Customers
“The key to success in business is all about people, people, people,” says billionaire entrepreneur Richard Branson. “It should go without saying, if you look after your people, your customers and bottom line will be rewarded too.” Real estate entrepreneur and software business leader Tej Kohli agrees. “While strategy, market positioning, and coming up with a long-term plan are all important, focus on making the individual sales and creating happy customers. None of that strategic planning is any good if you can’t keep the lights on because you’re not making enough sales.”
Do the Work
“There are no shortcuts,” says Mark Cuban. “You have to work hard and try to put yourself in a position where if luck strikes, you can see the opportunity and take advantage of it.” This sentiment echoes the formula for success of deceased oil tycoon J. Paul Getty: “Rise early, work hard, strike oil.”
“The biggest risk is not taking any risk,” says Facebook founder Mark Zuckerberg. “In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” But there’s a difference between playing smart and taking risks just for the sake of risks. Heed the warning of Warren Buffet, who says, “Never invest in a business you cannot understand. Risk comes from not knowing what you’re doing.”
Shake Things Up
John D. Rockefeller said, “If you want to succeed, you should strike out on new paths, rather than travel the worn paths of accepted success.” And Groupon co-founder Brad Keywell agrees. “I’ve been involved with companies that hit dead ends, had business ideas I couldn’t get off the ground, been in situations that I desperately wanted to succeed but were on a path to failure. But each setback and adversity could be traced back to the same flawed plan: I had approached the game the way it had always been played.”
Think Long Term
In an age of get-rich-quick schemes, it’s important to remember that there are no shortcuts to lasting success. Jeff Bezos, founder of Amazon, has said that Amazon’s decisions are based on its goal of long-term market leadership – not short-term profits. “Long-term thinking levers our existing abilities and lets us do new things we couldn’t otherwise contemplate,” said Amazon founder Jeff Bezos. “Seek instant gratification – or the elusive promise of it – and chances are you’ll find a crowd there ahead of you.”
Play to Your Strengths
Media CEO Gary Vaynerchuk advises to forget about your weaknesses and bet on your strengths. Founder of Spanx, Sara Blakely agrees. “As soon as you can afford to, hire your weaknesses. What you’re not good at is usually what you don’t like.”
“It’s fine to celebrate success, but it’s more important to heed the lessons of failure,” says Bill Gates. “How a company deals with mistakes suggests how well it will bring out the best ideas and talents of its people, and how effectively it will respond to change.” Perhaps Gates took a play from inventor and businessman Thomas Edison’s playbook, who once said, “I have not failed. I have just found 10,000 ways that don’t work.”
While it can be difficult to live debt-free in today’s world, many American adults attribute a majority of their debt to educational loans. In fact, recent statistics show that Americans owe approximately 1.48 trillion in student loan debt and about 44 million Americans are currently paying on their student loans.
The recent conversations around tax reform had many students and those still paying their loans concerned about what the tax changes would mean for their debt-to-income ratio. Early proposals suggested the repeal of student loan interest and educational assistance deductions, as well as tax-free tuition waivers, which certainly left many feeling uneasy. The proposed changes would have removed around $2,500 in deductions and would have considered tuition waivers and employer-assisted tuition as taxable income, effectively bumping many into higher tax brackets.
Luckily, when the final legislation was passed in December of 2017, none of these changes were included. But, what changes were in the final bill that could affect your education and how you save for it?
One significant amendment is the expanded usage allowed under Section 529 accounts, which are tax-advantaged savings and prepaid tuition plans intended to encourage taxpayers to save for college sponsored by educational institutions, states or state agencies under Section 529 of the IRS code. As of 2018, qualifying distributions from Section 529 accounts include tuition for elementary and secondary schools as well as tuition for private, public or religious college institutions. At the federal level, funds are limited to $10,000 per student during a taxable year, however, states have the option to enact a different approach at a state income tax level.
While Section 529 accounts saw expanded usage, Coverdell Education Savings Accounts, which allowed taxpayers to set aside up to $2000 a year in tax-free money for college education, will be phased out under the new tax laws. Since employer-assisted tuition was left unchanged under the new code, employers can still contribute up to $5,250 a year to an employee’s qualified continuing education. The student loan interest deduction of up to $2,500 was also left intact, however, if you make more than $80,000 as a single filer or $165,000 as joint filers, you no longer qualify for this deduction.
While many deductions and educational credits were kept under the new legislation, taxpayers should still be wary of the implications of long-term loan repayment options and deferring loans. Determining the best strategy for repaying loans quickly and educating yourself on ways to reduce the tax implications on current loans will likely leave your credit and your taxes intact and manageable in the future.