by Jean Miller | Accounting News, News, Retirement, Tax, Tax Planning - Individual
Mismanaged money, investment duds, a blown budget (or no budget), bad habits, the proverbial hole in your pocket. If financial regrets weren’t a thing, we wouldn’t need the Dave Ramseys of the world, but there’s a difference between splurging on an artisan cup of coffee and making a financial blunder that could have ramifications for years to come.
Some red flags that you’re about to jump into a bad financial decision include needing to justify your rationale, a lack of thorough research and homework, depending on a payment you haven’t received, falling for a too-good-to-be-true scheme, and not paying attention to that internal tugging known as instinct. You might say that you’re effectively ignoring these red flags if you’re tempted by any of the following common financial mistakes that could cause long-term consequences.
Taking a Loan from a 401(k)
Yes, you usually have five years to pay it back, and yes, it’s your money after all, but those who borrow from their 401(k) usually reduce or suspend contributions while they’re repaying the loan. This means they’re going months or even years without contributions, missing out on investment growth and company matches. Not to mention the interest on the 401(k) loan. It’s also a gamble because if you leave your company, the loan must be repaid within 60 days.
Claiming Social Security Early
Waiting until age 70 to tap into your Social Security is your best bet, but it’s generally recommended to wait at least until your full retirement age (currently 66-67). The earliest age to withdraw benefits is 62, but your monthly check would be reduced by approximately 25% for the rest of your life.
Making the Minimum Payment on Credit Cards
With mounting interest costs, it can take years to pay off credit card debt, especially if consumers continue to spend with credit cards while only paying the minimum payment. If possible, transfer the balance to a lower-rate card, and always try to pay more than the minimum payment due. Even a small increase in monthly payments can save you on interest.
Not Saving for Retirement
Unless you’re fresh out of college, you should start saving for retirement yesterday. Don’t think you can wait until you start making more money. According to Morningstar, and assuming a 7% annual rate of return, someone who starts saving for retirement at 25 years old would need to save $381 a month to hit $1 million by the time they turn 65. Compare that to someone who starts saving for retirement at 35 ($820 a month) or 45 ($1920).
Foregoing Professional Advice
Do you have a valid will? Have you legally appointed beneficiaries for your retirement accounts? Financial advisors will help with this as well as anything from taxes and insurance to retirement savings and estate planning.
Refraining from Investing
Sure, there’s risk involved, but by diversifying your investment in a mix of large, small, domestic, and foreign stocks, you reduce the possibility of getting hit with a big loss. Perplexed on where to begin? See “Foregoing Professional Advice” above.
And while your nest egg should keep growing after retirement, most financial planners recommend decreasing risk by gradually pulling away from investing in stocks.
Falling for Scams and Raw Deals
According to the FTC, Americans lost a collective $765 million to telephone, text, mail, email and face-to-face scams in 2015. Requests to wire money; or pay fees before receiving anything; or provide personal information, bank information, or sensitive financial information should be met with extreme skepticism. If you suspect a scam, conduct a quick Google search with any information you have on the product or company, including key words like “scam” or “review”. If your suspicion is confirmed, be sure to file a complaint with the FTC and your local consumer protection office.
by Jean Miller | Business Consulting, IRS, News, Retirement, Tax, Tax Consulting, Tax Planning - Individual, Tax Preparation - Individual
For some employees, simply opening a Roth IRA or another retirement account independent of your employer may be sufficient and necessary. But many employees should consider digging into the details of why your employer does not offer a retirement savings plan. And if you think your company is one of the few who doesn’t offer one, unfortunately, nearly half of U.S. companies don’t provide their employees with a 401(k).
When it comes to smaller firms, many avoid the offering simply due to high start-up costs and time commitments, as administering the plan and ensuring it meets regulatory requirements can take serious time and attention. Retirement offerings also present significant liabilities for firms, including civil or criminal penalties for plan administrators if legal and regulatory compliance is not met. According to the Census Bureau, the combination of fees, time and risk may be why over 90% of small businesses do not offer a 401(k). Others may simply not be aware their employees desire a plan.
Like your company, but want help saving for retirement?
If you would like to see your company add a 401(k) plan, the first step is talking to other employees to determine the collective interest in a plan and how many individuals would “buy in” if offered one. Your employer may not be persuaded by one employee’s desire for a plan, but a group request will likely garner more weight. Remind your employer they would also reap benefits from a business standpoint (lowering taxes) and a personal standpoint (their own retirement savings).
Step two involves doing your homework. Is your boss concerned about the risks involved? There are plans whose providers will share legal responsibilities, so research plans and present several options to your supervisor. Is time or added work/stress the issue? Talk amongst your co-workers and determine a strategy for divvying up duties so one person isn’t burdened with added responsibilities. Supportive plan providers can also help companies create a structured strategy to manage the extra work
Overcoming hurdles to a company 401(k)
What if cost is my employer’s biggest concern? Plan start-up fees can sound daunting to small firms, but consider the company’s spending and ways those costs could be mitigated or offset, such as through tax savings or by redistributing the holiday party budget to cover expenses. Inform your employer that many employees might prefer or expect a 401(k) over a holiday party, so using those funds could attract and retain quality employees.
Being prepared and showing your boss that the added time and effort is advantageous will go a long way. Offering a 401(k) can grow their business, supplement their goals and maintain and engage new employees, which is critical in today’s job market. Taking the time to research beforehand and help whoever is in charge throughout the process may seem like the last item you want to add to your plate, but the benefits are twofold for you as well. Not only will you be able to start saving for retirement in a tax-advantaged way, but your employer may also notice your strategic drive, organization and initiative, which could benefit you as new company opportunities or initiatives arise.
Related Article:
Millennials and Roth IRA’s: Why the Two Make a Perfect Pair
by Daniel Kittell | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
Although it came a few days later than expected, the Republican Party has finally released its most recent version of their tax bill. Below are 12 major changes that would affect most taxpayers:
- Lowering the number of income tax brackets
Currently, our tax code has seven brackets, but the new bill would lower that to four: 12% for those making less than $45,000, 25% for those making between $45-$200,000, 35% for those making between $200-$500,000, and 39.6% for those making over $500,000.
- Doubling the standard deduction
Singles would see their standard deduction rise from $6,350 to $12,000 and couples filing jointly would see an increase from $12,700 to $24,000.
- Child tax credit expansion
The credit itself would increase from $1000 to $1,600 for every child under 17, although low income families with no income tax would still be given the standard $1000 as a return. However, the phase out income for this tax would increase from $75,000 to $115,00 for single parents and from $110,000 to $230,000 for married parents.
- New family credits
Both credits are in the amount of $300. One credit is for each parent (so $600 for those filing jointly and $300 for single parents). The other would be for any non-child dependents, including elderly parents, adult children with disabilities or a child over 17 whom you are still supporting.
- Elimination of tax exclusion for dependent care FSA’s
Our current tax code allows parents to save up to $5,000 to place into a dependent care flexible spending account, which is considered nontaxable income. The new bill would make that income taxable.
- Elimination of personal exemptions
Current code permits a $4,050 personal exemption for each member of your family, but the new bill would eliminate personal exemptions entirely.
- Does not change 401K’s
Previous proposals had considered lowering the cap on pre-tax contributions to a 401K, but it appears that enough opposed this move so 401K’s were left alone.
- Deductible mortgage interest limited
If you already have an existing mortgage, your deduction would remain the same. However, new mortgages would only be allowed to claim a deduction for interest on mortgage debt up to $500,000, a drop from $1 million.
- Repeals the Alternative Minimum Tax
The tax intended to ensure the highest filers pay some tax by disallowing many breaks, although it usually affects those who make between $200,000 and $1 million, would be repealed in the new code.
- Repeals state and local deductions
The new bill would remove the deduction for state and local income or sales tax. However, in the light of strong opposition, the new bill would preserve a property tax break as an itemized deduction for property taxes up to $10,000.
- Estate tax repealed
The current estate tax only affects those with assets over $5.5 million, but the new proposal would eliminate this tax beginning in 2024 and would raise the exemption amount in the meantime.
- Other deductions repealed
Deductions for student loan interest, moving expenses, alimony payments, medical payments and tax preparation fees would all be removed.
by Pete McAllister | Accounting News, News, Retirement, Tax Planning, Tax Planning - Individual
Often, for Baby Boomers or older generations, starting your career meant finding a company in your desired field and, unless there were layoffs or the company went bankrupt, staying there until you retired. Today, we live in the land of the Millennial, who now make up almost 35% of today’s workforce. But, for the Millennial generation, staying with the same company, and sometimes even in the same career, is grossly uncommon. According to analysis performed by LinkedIn, those who graduated college between 2006-2010 had, on average, three different jobs within their first five years in the workforce.
So what does that mean for retirement? You may find yourself asking, even if you’re not a Millennial, does that mean I should never switch companies? Will I ever be able to retire? Although finding a new career path or taking a leap of faith with a new company should not be discouraged in any way, too much jumping around may put you, and your retirement funds, at a greater risk, and here’s how:
- Waiting periods for 401(k)’s – Many companies require you to be employed for anywhere from three months to a year before they allow you to join their retirement program, meaning you are missing out on months you could be contributing if you move jobs too frequently.
- Distribution of Employer Matches – Many retirement plans also require you be with the company for a certain amount of time before you can take employer-matched funds out when you leave, a requirement you may never meet if you don’t stick around long enough.
- “Cashing out” can hurt your wallet – If you have only been with a company for a short time, but already began contributing to a 401(k), it may seem more appealing to simply cash out the small funds you have in the account. However, cashing out that money will mean you not only get taxed on the sum, but will also receive a 10% early distribution penalty.
Solutions to combat retirement fund shortage include opening an IRA, rolling your 401(k) funds into an IRA if you leave a company, or rolling funds into a 401(k) plan at your new company if your new employer permits transfers. Although the annual IRA contribution allowance is lower than that of a 401(k), any advisor would tell you that putting something into a retirement fund is better than not contributing at all. Many might say to just remain in your current role, but if a switch is needed, or gets you closer to your personal or financial goals, then consider your future beyond the workforce and take your retirement into your own hands.
If you have any questions, please contact me at [email protected].
