Wednesday, September 7, 2016

401(k) Withdrawal Options

You contributed to a 401(k) retirement plan for years and your employer added some matching funds. Now that you’re ready to retire it’s time to think about how to withdraw your money.

Two sets of rules govern your 401(k). Both the Internal Revenue Service and your plan administrator (probably your employer) oversee what you can do with the account. The IRS controls how your choices affect your taxes, the administrator how you invest and can withdraw assets.

If you’re 59½ or older, you can withdraw funds from your 401(k) without paying a tax penalty (generally 10% of what you take out). Under some circumstances involved in leaving a job, you can also withdraw a lump sum penalty-free if you’re older than 55.

Note: You avoid penalties, not ordinary income taxes. Some retirees delay taking withdrawals as long as possible, often to help savings compound safe from taxes.

Beginning the year you turn 70½, you must begin taking annual required minimum distribution (RMD) withdrawals. The amount is related to your life expectancy. To estimate your RMD, divide one by the number of years of your life expectancy, according to the IRS, and multiply that by the value of the assets in your 401(k).

Most financial advisors recommend that you take your money out of the 401(k) once you retire, either as a one-time distribution or as a rollover (a penalty-free transfer) into an individual retirement account. You avoid plan fees and gain greater flexibility in investing your funds.

If you decide to keep your money in the 401(k), you must adhere to the rules affecting both your options for distribution and your investment choices. Check with your plan administrator to find out how to take out your money; most will allow you to make periodic or regularly scheduled withdrawals. Other rules may also cover your RMDs or when and how often you can change your distribution options.

Again, withdrawals will be added to your taxable income unless you roll them over into a qualifying IRA. (Check the IRS chart to see how to safely transfer money from one kind of retirement account to another.)

Rolling into an IRA may well be your best choice: You have lower fees, more investment choices and similar distribution rules but can still let your money compound tax-free.

If you plan to take your distribution in cash, do some tax planning. Taking a regular distribution will allow you to spread the taxes and keep you in the lower tax brackets. Taking a lump-sum distribution might throw you into a higher bracket designed for the wealthy; your distribution will also incur a 20% withholding that you can apply to your next year’s tax bill.

A popular option is to take part or all of your distributed funds and buy anannuity to provide steady retirement income. Annuities come in various types. Retirees tend to prefer ones that provide guaranteed lifetime payouts.

Proponents point out that with an annuity you can’t outlive your money. You need to realize, though, that not all annuities are indexed for inflation(currently less than 1%). Your monthly guarantee might look good today yet buy much less in 20 years if prices rise.

You face the culmination of years of saving, and your moves will affect your finances for the rest of your life. You must think about many variables: how much you saved; your investment philosophy; your income needs, expected longevity and tax situation. Even your children’s financial situation can sway your decision.

No one choice suits everyone.

Wednesday, August 12, 2015

Bad Money Ideas of the Young

You found the one to start a life with. You now share home, love – and your financial backgrounds with your new partner and family. Here’s what to know and how to tackle debt, budgeting and other aspects of your newly merged money matters.

Young couples and families often begin the journey together with a large amount of debt from student loans, car payments and perhaps one or both partners’ past credit card usage. The responsibilities of starting a family only deepen the hole.

If you are a young adult still looking for a high-paying job, who can’t afford a home or car and who constantly struggles with debt, then financial planning and effective debt management can help you. So can dispensing the following preconceived money notions common to young families.

We don’t need professional help. Young families with debt – especially those with children – need to think hard about meeting a financial planner to put finances in order. A planner can not only set a proper budget for you, but also advise you on how to invest for the best possible returns.

For example, planners can advise you on saving for a home, setting up a college fund for your kids and establishing a fund to handle unexpected emergencies.

What’s wrong with a little credit card debt? The greatest financial blunder a young family can make is carrying too many credit cards – and the accompanying huge bills and balances.

Mitigating and managing credit card debt becomes particularly tricky when these balances typically carry one of the highest rates of interest (often more than 17%). Inexperienced new adults with fresh plastic frequently make the mistake of paying only the monthly minimum. Continuing to do this means paying off the entire balance – assuming a family racks up no more debt on a given card, which is unlikely – will take more than a decade.

Attempt to make at least $100 more than the minimum payment on each card account and try to use cash instead of plastic as much as possible. If you or a member of your family has difficulty controlling card use, you can look for assistance from a credit counselor.

Let’s fly without a budget. Poor budgeting is close kin to any debt issue. Young couples tend to overspend mostly because they often underestimate expenses and practice the flawed habit of spending first and then planning to save what’s left. Unfortunately, spending incessantly rarely leaves anything at the end of the month.

Make (and follow sincerely) a frugal budget, keeping in mind all your daily expenses and saving plans, needs and intentions.

Retirement is far away. Many young adults just don’t understand the significance of saving for retirement and so skip investing in 401(k) workplace retirement plans or individual retirement accounts. These youngest wage earners literally labor under a misconception that the future is too far away to worry about, and instead focus on such short-term goals as buying a new car.

If you invest at least 15% of your income in retirement savings consistently from an early age, you’ll remain far ahead financially after retirement. Here’s timeless advice for all young adults: You’ll need that money sooner than you think.

Thursday, July 30, 2015

4 Must-Reads on Debt

The lack of financial education is often the main reason behind debt problems. Here are some awesome books that help grow your financial knowledge and give you all the necessary tips and tricks to manage your debt.

Americans are drowning in credit card debt. Families in the U.S carry $600 billion in card debt, Equifax, one of the three credit bureaus, estimates. Millions of people looking for debt relief are feeling helpless.

Debt-strapped people should always keep themselves updated about the possible ways to get rid of debt. These four great books filled with tips and effective strategies to avoid and eliminate credit card debt can help you in a major way.

Building Wealth and Eliminating Debt. This exceptional book by Charles Carradine is your ticket to financial prosperity. It discusses many personal finance issues in a comprehensive manner. It is a literary manual which endeavors to improve your financial condition.

The author shares tips on a wide range of topics including avoiding debt, its impact on your credit score and protecting yourself from credit card scams. Carradine says that his aim is to educate the readers on how to stay clear to debt and correct poor financial behavior.

How to Settle Your Debts without Committing FinancialSuicide. Author Norman Perlmutter has the predicament of people who struggle with credit card debt in mind. Being a “get-out- of-debt coach,” Perlmutter treats topics like elimination of credit card debt, repairing of credit and reorganizing your finances with considerable expertise. He lists the dos and don’ts when dealing with creditors so that you can successfully settle your credit card debt and avoid bankruptcy.

The Total Money Makeover. Your financial education cannot be complete without reading this acclaimed book by Dave Ramsey. The immensely popular financial expert suggests a slow but steady seven-step strategy for you to attain financial freedom.

Ramsey advises maintaining a rainy day fund of at least $1,000 and following a snowball approach to get out of debt. The book also gives you 50 real-life examples as encouragement.

Life or Debt 2010: A New Path to Financial Freedom. This book by Stacy Johnson is dedicated to helping the debt-stricken get back on their feet. Here, Johnson discourses extensively on money management. He particularly emphasizes how to avoid money traps that push you toward debt. His no-nonsense approach to financial education will keep you from indulging in indiscreet use of credit cards.

Financial education is something that you cannot afford to slight, particularly during times of debt troubles. You need to know all the possible options available to keep yourself afloat. If you read the above books, staying clear of debt and avoiding debt relief programs like debt settlement and consolidation will be much easier.

Thursday, April 2, 2015

New Investor Tips

Looking to grow your income to finance your hobbies, expand your business, or contribute to a nest egg, making your investments work for you is surprisingly simple.  Jumping into the investment market as a teen or a retiree makes no difference, there are both quick and slow ways to build up your investments.  Pick an investment type that works for you.

Types of Investments

Each type of investment carries its own set of risks (the probability of liability or loss) and potential gains (quick turn profit or growth over time).  Generally, the more risk involved, the higher potential there is for larger gains or loss.  Buying stocks and shares, for example, offer short-term gains but are a quick way to turn a profit.  Listed below are a few types of investments that people of all ages typically deal with:

Stocks and Shares:  With stocks and shares, the investor buys a percentage of ownership of a public business, therefore making them a part-owner of the business.  Stocks can be highly profitable—the more successful a company or a stock is, the more money you stand to make.  Stocks are high-risk, though, because the market is unpredictable, and the shareholder risks losing some of all of their investments. 

Bonds:  Bonds yield little risk, and therefore do not have a high potential for returns.  Bonds are like IOUs that you lend out to companies, councils or the government.  Interest is paid back to the lender on the amount loaned. 

Property: Buying, restoring, and renting or selling real estate can potentially net large sums.  Like stocks, however, the market is unpredictable.  Economists have been predicting a major recovery in the housing industry for 2013, though, so it would be best to look at trends in your local area if you’re looking to invest in property.

Certificates of Deposit (CD):  CDs are fixed-period investments with banks or savings and loan companies.  Like bonds, CDs rely on interest and carry a low risk. 

Commodities:  Commodities include gold, silver, jewelry and precious metals.  Like stocks, commodities are high risk because their value waxes and wanes in the unpredictable open market. 

Mutual Funds:  Mutual funds are a collection of assorted investments that may include stocks, bonds, properties and cash-equivalents, the purpose of which is to create a balanced portfolio.  Mutual funds contain both low-risk and high-risk investments, so sometimes investors consult outside agents to strategize their portfolio to try and achieve the highest potential for profit.

This is only a partial list of investment types.  Other types include but are not limited to: futures, cars, artwork, stamps, hedge funds and foreign exchange currencies.

Planning Appropriately Based on Your Age

If you’re a middle aged business owner that is looking to stretch out your earnings for a retirement plan, but do not have any experience with investing, where do you start?  Your investment trends should change over time.  The younger investor can afford high risk investments, while the older investor should play it safe and be conservative with their options to maximize their savings. 

The Young Upstart 
Young investors have the opportunity to learn the market from the ground up, so having a large portfolio is crucial to earning big.  Mutual funds provide a hassle free approach to investments with a high-yield potential.  They get you familiar with multiple investments.  Young investors should carry a higher percentage of stocks than bonds in their portfolios.  A good stocks/bonds percentage should look like 70/30 or 80/20. 

Mid-Life Planning
Middle-aged portfolio builders should begin to stay away from riskier investments.  Back off the stocks and mutual funds, and switch to safer, more predictable assets like CDs and bonds.  A middle aged portfolio should contain a stocks/bonds percentage close to a 50/50 split with a higher percentage of stocks at about 55 percent, and gradually reduce stocks down to 20 percent near retirement.

Finely Aged Entrepreneurs
If you are late in the game, don’t worry, there’s a plan for you.  To reduce stress, older investors can always hire a financial advisor that can help you work toward your goals and base a plan on your interests.  Beware of investment fraud.  Older people are often a common target for financial crime and scam artists.  Do not fall for high-pressure sales tactics, intimidation, limited offers, seminars, or “elderly specialists” with bogus certificates and accommodations.  As a rule, it’s best to stick with low-risk investments like bonds, CDs, smart real-estate, gold, fixed income cash investments and long-term care insurance.  A starting portfolio for older investors should be around 35 percent or lower in stocks and 65 percent or higher in bonds. Older investors should look into IRAs, which provide instant tax benefits with annual contributions.  Open a brokerage account with Charles Schwab, Scott-trade, E-Trade or other popular brokerages, they usually have fewer restrictions and give you more control over your investment.  

No matter your age, it is important to find an investment plan that works for you—there’s money to be made. 

Wednesday, March 4, 2015

Wonder Who Should Do Your Taxes?

Your payroll forms and stock records start to arrive in the mail and you begin to swear you’ll soon gather up all those receipts. Tax Day looms. Who’ll help file your 2014 return?

Every U.S. citizen living and working in this country or abroad must determine the federal income taxes he or she owes, as well as taxes owed to individual states or other local authorities. The deadline to pay those taxes for yearly salary earners falls on April 15 of most years, including 2015. If you pay taxes quarterly, you face deadlines in April, June, September and January.

Whichever category you find yourself in year to year, you must choose how to file a tax return before the deadline, as well as which filing status you qualify for. Generally, your choices for filing status are:

  • Single or head of household, meaning you detail on tax forms only your income, deductions and tax breaks.
  • Married filing jointly, meaning you and your spouse report your combined income and deduct your combined allowable expenses.
  • Married filing separately, which absolves each of you for the other’s possible unintentional omissions or deliberate errors.

Because some filing statuses can be more advantageous for you than others, determine the filing path that best suits your personal and financial situation.

Next, decide who if anyone will help prepare and file your return. The average fee nationwide for preparing a tax return, including an itemized Internal Revenue Service Form 1040 with Schedule A (for itemized deductions) and a state tax return, is $273 this year, according to a survey by the National Society of Accountants.

Using a certified public accountant or tax preparer is a common way to address your tax situation well before a deadline but many people continue to prepare and file federal tax returns themselves.

CPAs versus tax preparers. Even though CPAs and tax preparers may have significant experience in completing and processing tax forms, there are differences between each type of professional.

CPAs, for example, must undergo rigorous education and certification to become experts in many areas outside of tax preparation, such as accounting matters or other financial services. While you may very well pay more for the services of a CPA than for a non-CPA tax preparer such as an enrolled agent or a registeredtax return preparer, the additional cost generally covers the expertise to analyze complex tax situations.
If you believe your tax situation is relatively straightforward and simple, choosing a tax preparer might be a more cost-efficient method to file. Another advantage: These professionals offer you a degree of protection. If one of these professionals makes a clear error or miscalculation on your return, the IRS often holds the preparer accountable before penalizing you.

Remember: Booking a professional preparer becomes harder the closer we get to the filing deadline.

Filing yourself. Individual or self-filing can be an option if you want to save money on hiring a CPA or preparer and especially if you’re experienced with tax filing. If you make less than $60,000 a year, you can find free forms and other tools on the IRS FreeFile page.

Several national tax chains, local and national organizations, and even makers of tax software offer free or low-cost preparationservices both in-person and online. Online services allow you to enter employment information that generates the necessary documentation needed to file both state and federal income taxes.

Among those that charge a fee, these alternatives generally cost $12 to $25, depending on the complexity of your return. While these services may be cost-efficient and user-friendly, you do risk incorrectly inputting data or taking an inappropriate deduction.

Complexity of your employment often dictates the best option. For example, if you hold a long-time job with the same company or organization and take a few standard deductions, you might simply go with a preparer or an online, self-filing service. If you changed jobs more than twice in a year or are an independentcontractor, you probably ought to consult a CPA or other experienced preparer.

Either way, start your preparing long before the tax deadline.

Kimberly J. Howard, CFP, CRPC, ADPA, is a Certified Financial Planner and the owner of KJH Financial Services, a Fee-Only practice located in Newton, Mass. and Denver
(781-413-4879). Please visit us at or email Kim at Follow on Twitter at @kimhowardcfp.

Tuesday, January 27, 2015

Income Tax Deductions To Remember

At tax time, every possible deduction can help when money is tight. Yet many available legal deductions go unclaimed each year, simply because most Americans still don’t know they exist. From cost savings for eyeglasses to approved deductions for airline baggage fees, no matter who you are, you’re likely to find at least one applicable deduction on the list below—and odds are you qualify for more than one. So read carefully, the savings can add up…

• Job-hunting costs are applicable expenses that can be added to your itemized deductions. Did you spend out-of-pocket costs traveling to interviews or spend money stationery for resumes and cover letters? If so, deducting these items can make a big dent at tax time. And one doesn’t have to be officially unemployed to qualify. Searching for a better job, even while fully employed, is perfectly acceptable. Other applicable deductions include food and lodging for overnight stays, cab fares, and employment agency fees.

•If that new job is your first job, any incurred moving expenses may indeed be deductible. To qualify for the deduction, your first job must be 50 miles or more from your previous residence. Those who qualify can deduct the cost of moving and, if you drove your own vehicle for the move, deduct 23 cents a mile plus parking and tolls.

• While everyone recognizes that necessary medical items like wheelchairs and hearing aids may be deducted, few realize that eyeglasses and contacts also fall into the same category. While designer eyeglasses, or drug store magnifiers, may not seem like medical devices, the IRS does allow these deductions – a big cost savings at tax time.

• Though we all known charitable contributions are tax deductible – one of the most common ways that Americans gain tax deductions – many less obvious acts of charity also qualify, Out-of-pocket charity expenses such as the cost of paint and poster board for a school fundraiser, or the cost of delivering meals or chauffeuring other volunteers can be deducted. Such mileage deductions may be totaled at a rate of 14 cents per mile plus parking and toll fees. Deductions of more than $250 will require a written acknowledgement from the charity involved.

• Members of the National Guard or military reserve may claim a deduction for travel expenses to drills or meetings. In order to qualify, the service member must travel more than 100 miles from home on an overnight journey. Applicable deductions include lodging, meals, and 56 cents per mile plus parking and toll fees.

• For those employees who have served on juries in the past year, jury duty may represent a taxable deduction. Many employers continue to pay their employees during the time of jury proceedings, but require the employees to turn over jury pay as a recompense for the time away. To even things out, you can deduct the amount you give to your employer. In such cases, the write-off goes on line 36 – the line totaling up deductions that get their own lines. Add your jury fee total to your other write-offs and write "jury pay" on the line directly to the left.

• Airline baggage fees are another deduction that is rarely recognized by the American traveling public. All told, these fees can add up to serious costs. If you're self-employed and travelling on business, you can add those costs in as approved business deductions.

• While many tax credits for energy-saving home improvements have expired, the most valuable credits still exist until 2016. These applicable credits will effectively refund 30% of the of alternative energy upgrades such as solar hot water heaters and geothermal heat pumps.

• In most cases, one can only deduct mortgage or student-loan interests if one is legally required to repay the debt. But if you’re a non-dependent student who still receives help from mom and dad, you parent’s generosity may help you at tax time. If mom and dad pay your loans, the IRS treats the money as a gift to the child who used it to pay the debt. As such, a non-dependent child can qualify to deduct up to $2,500 of student-loan interest paid. Be advised, however, that mom and dad can't claim the interest deduction. Legally, it’s not their debt.

Just remember, in order to get the most out of your tax returns, you must stay as organized as possible, and do your research—no one likes getting audited.