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).
Are your employees reimbursed for work-related travel expenses? If not, you might want to reconsider. Changes under the Tax Cuts and Jobs Act make reimbursements even more attractive to employees.
The new tax code implemented significant changes to moving and travel expenses, including business-related travel expenses incurred by employees. Under the previous law, work-related travel expenses that weren’t reimbursed were generally deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to take advantage of the deduction because they a) didn’t itemize deductions, or b) didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.
With the new tax code, business travel is still entirely deductible, but not by individual taxpayers because miscellaneous itemized deductions, including employee business expenses, are no longer permitted to be claimed on individual tax returns. Instead, only businesses are able to deduct these expenses, which is why business travel expense reimbursements are now more significant to current employees and more attractive to prospective employees.
In order to be deductible, travel expenses must be valid business expenses and the reimbursements must adhere to IRS rules – either with an accountable plan or the per diem method.
Employee expenses reimbursed under an employer’s accountable plan do not contribute to the employee’s income. The accountable plan is a formal agreement to advance, reimburse or grant allowances for business expenses. To qualify as an accountable plan, it must meet the following criteria:
- Payments must be for “ordinary and necessary” business expenses
- Employees must substantiate these expenses (including amounts, times, and places) monthly
- Employees must return any advance or allowances they can’t substantiate within a reasonable time, typically 120 days
Plans that fail to meet these guidelines will be treated by the IRS as “non-accountable”,
and reimbursements will be included in the employee’s gross income as taxable wages subject to withholding and employment taxes (employer and employee).
In some cases, the per diem method may be used. Instead of tracking actual business travel expenses, employers use IRS tables to determine reimbursements for lodging, meal, and incidental expenses. Substantiation of time, place, and amount must still be provided, and the IRS imposes heavy penalties on businesses that routinely pay employees more than the appropriate per diem amount.
If you have any questions about the TCJA’s impact on your business, please feel free to reach out to me at firstname.lastname@example.org.
President Trump signed the Tax Cuts and Jobs Act in December of last year, but the income tax credits, deductions, and individual tax rates aren’t applicable until the 2019 tax-filing season. Various factors, such as your tax bracket, can influence whether your taxes will increase under the new tax code. Below are some indicators that could signal an increase on your tax bill.
Do You Have a Large Family?
The new tax code eliminated personal and dependent exemption deductions, which was estimated to have been $4,150 each in 2018 under previous law. However, standard deductions were nearly doubled. For 2018-2025 the deductions are as follows:
- $12,000 for single (previously $6,350)
- $24,000 for joint-filing marries couples (previously $12,700)
- $18,000 for heads of households (previously $9,350)
The elimination of dependent exemptions hurts some families and benefits others. Large families, who don’t benefit from increased standard deductions, will be hit the hardest.
Are You an Average Taxpayer?
If you have a conventional job, file a W-2, and don’t own a lot of property or foreign investments, your taxes won’t likely increase. Instead, you should see a modest decrease as a result of lower tax rates, increased standard deduction, and an increased child tax credit. Despite this, however, there are thousands of potential tax situations that could affect the average taxpayer differently (i.e. a wealthier couple with children who itemize state and local taxes would be limited to a $10,000 deduction under the new law – a loss of $20,000 in deductions – and would likely have higher taxes under the new tax code).
Are You Withholding Enough from Your Paycheck?
The IRS changed the tax withholding tables back in February. The tables are calculated by how much income you earn and the number of allowances you claim. If you aren’t withholding enough from your paycheck, you could end up owing taxes. Check the tax withholding tables on IRS.gov to determine how much income tax should be withheld from your paycheck.
Do You Have Older Children?
The new tax code increases the child tax credit from $1,000 to $2,000 per child under the age of 17. Taxpayers with children over 17 only receive a $500 tax credit.
Do You Have High Property Taxes?
Under prior law you could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. So, a big property tax bill could be completely deducted if you itemized. However, under the new tax code, itemized deductions for personal state and local property taxes and personal state and local income taxes are capped at $10,000 ($5,000 if you use married filing separate status).
Even considering the above factors, with the myriad of potential tax circumstances and the complexity of the changes implemented by the Tax Cuts and Jobs Act, it’s difficult to predict how your taxes will be affected until you run the numbers.
If you have any questions about how to plan for your 2018 tax return, please feel free to contact me at email@example.com.
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.
Established in 2003, HSAs allow individuals with high-deductible health plans to pay for current healthcare expenses and save for future healthcare expenses on a tax-favored basis. Money is deposited pre-tax, it grows tax-free, and is distributed tax-free as long as the funds are used for qualified health care expenses. Aside from the obvious benefit of tax savings, below is a breakdown of advantages and disadvantages of HSAs to help you determine if it’s a good fit for you.
- Most HSAs come with a debit card to make paying for prescriptions and other expenses easy. Bills can be paid over the phone with this debit card, and you can access cash at an ATM.
- Long lasting and portable. If you change health insurance plans, change jobs, or enter retirement, funds left in your HSA remain available for use. They can be used for qualified medical expenses and continue to grow tax free.
- Roll-over funds. Unlike FSAs (Flexible Spending Accounts), any money left in an HSA at the end of the year automatically rolls over to the next year.
- In addition to personal contributions to your HSA, your employer and anyone else may contribute, and the recipient of the contribution receives the tax deduction for the amount contributed.
- High deductible requirement. Although you pay less in monthly premiums, you are responsible for all healthcare costs until the deductible is met.
- Unexpected healthcare expenses. It’s possible that healthcare costs could exceed your HSA savings.
- Savings ambition. The desire to save money versus the necessity for healthcare when you need it could set up an internal struggle.
- Recordkeeping. This time-consuming task is a necessity as you’ll have to keep receipts and prove that withdrawals were used for eligible healthcare expenses.
- Taxes and penalties. Withdrawing funds for non-qualified expenses before age 65 results in a 20 percent penalty and taxes owed; after age 65 you’ll pay taxes but no penalty.
- Fees. Some HSAs charge monthly maintenance or per-transaction fees, though typically not high. Sometimes if a certain minimum balance is maintained, these fees can be waived.
The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.
The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.
The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.
If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.