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Debt, Personal Finance, Retirement

How My 401k Loan Cost Me $1 Million Dollars

401k loan

Today, I have a great guest post from a reader, Ashley Patrick. She asked if she could share her story with my audience, and I, of course, had to say yes! This is her personal story about how her 401k loan cost her a ton of money and why you shouldn’t take be borrowing from your 401k.

You’ve been thinking about getting a 401k loan.

Everyone says it’s a great loan because you are paying yourself back!

It sounds like a great low risk loan at a great interest rate for an unsecured loan.

But you know the saying “if it sounds too good to be true, it probably is”.

So you’re thinking, what’s the catch?

I take out a loan without having to do a withdrawal and I pay myself back. I’m paying myself back at a low interest rate right, so what’s wrong with that?

Well, I’m about to tell you how our 401k loan cost us $1,000,000 dollars.

You see, there are a lot of reasons to not take out a 401k loan and they all happened to ME!

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How My 401k Loan Cost Me $1,000,000

 

Let me start at the beginning….

My husband and I bought our dream house when we were just 28 & 29 years old. This was our second house and honestly, more house than we really should have bought. But you know, it had a huge 40×60 shop and we loved the house and property. So there we were buying a $450,000 house with a 18 month old.

This house was gorgeous on 10 acres of woods with floor to ceiling windows throughout the entire house.

So there we were with a $2200 a month house payment, an 18 month old in daycare, and both of us working full-time. Within 2 months of us buying this house we found out I was pregnant again! We had been trying for sometime so it wasn’t a surprise but there was a major issue with our new dream home.

The layout didn’t work for a family of 3. It was a small 2 bedroom with an in-law suite that didn’t connect to the main house.

There was a solution though. We could enclose a portion of the covered patio to include another bedroom and play area and connect the two living spaces.

The problem was this was going to cost $25,000. We certainly didn’t have that much in savings and the mortgage was already as high as it could go.

So what were we to do? We have numerous people that were “financially savvy” tell my husband that we should do a 401k loan. We would be paying ourselves back so, we weren’t “really borrowing” any money. It was our money and are just using it now and will pay it back later.

 

Our first issue with the loan

This seemed like a perfect solution to our problem. So we took out a $25,000 401k loan in the summer of 2013. I checked the 401k account shortly after the loan and realized they took the money out of the 401k. I was very upset about this and thought there must have been some mistake.

Come to find out, they actually take the money out of your 401k. So, it’s not earning any compound interest. I thought that the 401k was just the collateral. I didn’t realize they actually take the money out of it.

So, nothing else seemed like a good option so we just kept the loan. Construction was finished just in time for the arrival of our 2nd child. The layout is much better and much more functional for our family.

Everything seemed fine and the payments came out automatically from my husband’s paycheck.

 

Then issue #2 with 401k loans

Then came the second issue with the 401k loan…..

In January 2014, my husband was laid off from his job. So there we were with a newborn and a 2 yr old in an expensive house and my husband, the breadwinner, lost his job of 7 years. You know the one he never thought he would lose, so why not buy the expensive house? Ya, that one, gone.  

I cried about it but figured out how long our savings and severance package would last and knew we would be okay for several months.

Well, then we get a letter stating we have 60 days to payback the 401k loan, which at this point was over $20,000. We had made payments for less than a year out of the 5 year loan.

My husband didn’t have job yet and we didn’t have that much in savings. I certainly wasn’t going to use what was in savings to pay that loan either. I may have needed that to feed my children in a few months.

So, we ignored it because we couldn’t get another loan to pay it at this point.

Luckily, I married up and everyone loves my husband. So, he was able to find another job rather quickly.

We were thankful he had another job and didn’t think about the 401k loan again.

Then came issue #3

That was until a year later in January of 2015. Here came issue number three with 401k loans.

We got a nice tax form in the mail from his 401k provider. Since we didn’t/couldn’t pay back the loan in the 60 days, the balance counted as income. You know, since it actually came out of the 401k.

Then I did our taxes and found out we owed several thousand dollars to the IRS. We went from getting a couple thousand back to owing around $6500. So it cost us around $10,000 just in taxes. It even bumped us up a tax bracket and cost us more for taxes on our actual income as well.

I ended up putting what we owed on a 0% for 18 months credit card and chalked it up to a big lesson learned. I will never take out a 401k loan again.

 

The silver lining

In reality, my husband losing his job has been a major blessing in our lives. He is much happier at his new job. This also started my journey to financial coaching.

You see, when I put the taxes on the credit card, I didn’t have a plan to pay that off either. When I started getting the bills for it, I realized I had no idea how we would pay it off before interest accrued.

That led me to find Dave Ramsey. Not only did we have it paid off in a couple months, but we paid off all of our $45,000 debt (except the mortgage) in 17 months!

 

The true cost of 401k loans

Just recently I did the math and realized what our 401k loan really cost us.

It cost us $25,000 from our 401k and roughly about $10,000 in taxes. So that’s already $35,000 from the initial loan.

We were really young for that $25,000 to earn compound interest. If we had left it where it should have been, we would have had a lot more money come retirement age.

The general rule of thumb for compound interest is that the amount invested will double every 7 years given a 10% rate of return. And yes, you can earn an average of 10% rate of return after fees.

We were 28 and 29 years old when we took that loan out. If we say we would retire or start withdrawing between 65-70 years old, then that $25,000 cost us around $1 million dollars at retirement age.

Now yes, I could try to make up for the difference and try to put more in retirement but I’ve already lost a lot of time and compound interest. Even if we had $25,000 to put in retirement today to make up for it, I’ve already missed a doubling. 

 

But that won’t happen to me, so why shouldn’t I take out a 401k loan?

Life changes and now I am not working full-time and have an extra kid. So, thinking that you will pay it back later doesn’t always happen as fast as you think it will.  

Something always comes up and is more important at that time. So learn from my mistakes and don’t take out a 401k loan.

Actually, start saving as much as you can as young as you can. 

You may even be thinking that you aren’t quitting your job and will pay it all back, so no big deal, right? Actually you are still losing a ton of compound interest even if you pay the entire thing back.

The typical loan duration is 5 years. That’s almost a doubling of interest by the time it’s paid back in full. So, it may not be as dramatic as my example but you are still taking a major loss at retirement age.

The thing is, you have to figure in the compound interest. You can’t only look at the interest rate you are paying. You are losing interest you could be gaining at a much much higher rate than what you are paying on the loan.

 

Lessons Learned from my 401k loan

Some lessons I learned from taking out this 401k are:

  • Don’t miss out on compound interest
  • It’s not a loan, it’s a withdrawal
  • If you want to change jobs or lose your job, it has to be paid back in 60-90 days depending on your employer
  • If you can’t or don’t pay it back, it counts as income on your taxes

So if you are considering a 401k loan, find another way to pay for what you need. Cash is always best. If you can’t pay cash right now, wait and save as much as you can. This will at least limit the amount of debt you take on.

Determine if what you want is a need or a want. If it’s a want, then wait. A 401k loan should be used as an absolute need and last resort.

It keeps you tied to a job for the duration of the loan which is usually 5 years. This could limit your opportunities and put you in an even bigger hardship if you lose your job.

I hope you will learn from my mistakes and make an informed decision about these types of loans. Don’t be like me and make an ill-informed decision.

Ashley Patrick is a Ramsey Solutions Financial Master Coach and owner of Budgets Made Easy. She helps people budget and save money so they can pay off their debt.

What do you think of 401k loans? Have you ever taken one out?

The post How My 401k Loan Cost Me $1 Million Dollars appeared first on Making Sense Of Cents.

Source: makingsenseofcents.com

Personal Finance, Retirement

Roth IRA vs. Roth 401(k) – Choose The Best Plan For You

The Roth IRA vs. the Roth 401(k) – they have so much in common, yet they’re also so different! How can that be, since are both Roth plans? Mostly, it’s because one is an employer-sponsored plan, and the other is a self-directed account.

But the IRS allows certain specific benefits for each plan type. The Roth IRA versus the Roth 401(k) – how are they similar, and how are they different?

Table of Contents

  • Roth IRA vs. Roth 401(k) – The Similarities
  • Differences Between Roth IRA and Roth 401(k)
  • Which Will Work Better for You?

Roth IRA vs. Roth 401(k) – The Similarities

On the surface, the two Roth plan types seem to be identical. And in regard to the basic structure of the two plans, there is a lot of common ground.

Both Provide Tax-free Distributions in Retirement

The biggest distinguishing factor about a Roth plan, the one that makes it so attractive for so many people, is it offers the opportunity to create a tax-free income source in retirement. This benefit is available whether you have a Roth IRA or a Roth 401(k) plan.

In order to qualify for tax-free income in retirement, distributions cannot be taken before you reach age 59 ½. In addition, you must be participating in a Roth plan for a minimum of five years at the time distributions are taken. But as long as you meet those two criteria, the distributions you receive from the plan will be tax-free.

This makes Roth plans completely different from other tax-sheltered retirement plans, such as traditional IRAs and 401(k) plans.

All other retirement plans are merely tax-deferred. That means while you get generous tax benefits during the accumulation phase of the plan, you will have to pay ordinary income tax when you begin taking distributions in retirement.

In this way, both Roth IRAs and Roth 401(k) provide excellent tax diversification strategies for retirement. This means either will allow you to have at least some tax-free income along with other income sources that are fully taxable.

Neither offers Tax-deductible Contributions

When you make a contribution to a Roth plan, whether it’s an IRA or a 401(k) account, there is no tax deduction. This is unlike both traditional IRAs and 401(k) plans, where contributions are generally fully deductible in the year they’re made.

In fact, tax deductibility of contributions is one of the major reasons why people participate in retirement plans. But no such deduction is available for either a Roth IRA or a Roth 401(k).


 

You can Withdraw Your Contributions from Either Plan at Any Time – Tax-free

There is another unique feature of Roth accounts, and it applies to both Roth IRAs and Roth 401(k)s. That is, you can withdraw your contributions from a Roth plan at any time, without having to pay either ordinary income tax or the 10% early withdrawal penalty on the distributions.

This is in part because Roth IRA contributions are not tax-deductible at the time they are made. But it’s also true because of IRS ordering rules for distributions that are unique to Roth plans. Those ordering rules enable you to take distributions of contributions, ahead of accumulated investment earnings.

There is some difference in exactly how early distributions are handled among Roth IRAs and Roth 401(k)s.

Early distributions from Roth IRAs enable you to first withdraw your contributions – which were not tax-deductible – and then your accumulated investment earnings once all of the contributions have been withdrawn. This provides owners of Roth IRAs with the unique ability to access their money early, without incurring tax consequences.

With Roth 401(k)s the contribution portion of your plan can also be withdrawn free of both ordinary income tax and early withdrawal penalties. But since they’re 401(k)s, they’re also subject to pro-rata distribution rules.

If you have a Roth 401(k) that has $20,000 in it, comprised of $14,000 in contributions and $6,000 in investment earnings, then 30% ($6,000 divided by $20,000) of any early distribution that you take, will be considered to represent investment income.

If you take a $10,000 early distribution, $3,000 of it, or 30%, will be considered investment income and subject to both income tax and the 10% early withdrawal penalty. The remaining $7,000, or 70%, will be considered a withdrawal of contributions, and therefore not subject to tax or penalty.

IMPORTANT NOTE: Not all 401(k) plans permit early withdrawal of Roth contributions, for all the same reasons they don’t permit early withdrawals from 401(k) plans in general. Many only allow for early withdrawals as either loans or hardship withdrawals. The rules we discussed above are IRS rules, not employer rules.)

Both offer Tax-deferred Investment Returns

Despite the lack of contribution deductibility, both plans have one major feature in common with other retirement plans. That’s the money contributed to the plans will accumulate investment income on a tax-deferred basis.

So, how can an account that is supposedly tax-free in retirement, be merely tax-deferred during the accumulation phase?


 

It gets down to early withdrawals. We’ve already discussed how you can withdraw your contributions early from either a Roth IRA or Roth 401(k) without creating a tax liability. But if you’re distributions also include investment earnings, the situation is different.

Accumulated Investment Earnings are Taxable if Withdrawn Early

Whether you have a Roth IRA or a Roth 401(k), if you take distributions from either plan that includes investment earnings (which it will under the pro-rata rules for the Roth 401(k)), and you are either under age 59 ½, or have been participating in the Roth plan for less than five years, those earnings will create a tax liability.

Let’s say you have been taking early distributions from your Roth plan. You have already withdrawn the full amount of your contributions to the plan. You continue taking distributions, but you are now withdrawing funds that represent accumulated investment earnings.

Those withdrawals – the ones that are comprised of accumulated investment earnings – will be subject not only to ordinary income tax, but also the 10% early withdrawal penalty. In this way, early distributions from a Roth plan are handled the same way they are for other retirement plans, at least in regard to the withdrawal of investment earnings.

This is the reason why, technically speaking, investment earnings within a Roth plan accumulate on a tax-deferred basis, rather than fully tax-free.

Distributions from Either won’t Affect the Taxability of Your Social Security Benefits

This is another advantage that applies to both the Roth IRA and the Roth 401(k) plan.

Distributions from other retirement plans are added to your taxable income in retirement. But not only will those distributions be subject to income tax, but they will also affect your income in calculating how much of your Social Security income will be subject to income tax.

Under current law, Social Security income is subject to income tax using a two-tiered calculation. If your combined retirement income falls below one of these limits, then your Social Security benefits are not taxable. However, if you are single, and your combined income exceeds $25,000, then 85% of your Social Security benefit will be taxable.

If you’re married filing jointly, and your combined income exceeds $32,000, then 85% of your Social Security benefit will be taxable.

Now the term “combined income” refers to income from all other sources – investment income, like interest, dividends and capital gains; other retirement income, like pensions and distributions from traditional IRAs and 401(k)s; and any earned income.

Your Roth plan distributions don’t count toward that calculation! For Social Security purposes, it’s as if the distributions from your Roth plans don’t exist. Since they’re not taxable, they’re not included in “combined income”, and will be excluded from the threshold calculations.

This is yet another way Roth plans provide for tax diversification in retirement.

That covers the similarities between Roth IRAs and Roth 401(k)s. But let’s move on to the differences,

Differences Between Roth IRA and Roth 401(k)

Most of the differences between the Roth IRA and Roth 401(k) have to do with the fact the Roth 401(k) is part of an employer-sponsored plan. That by itself creates a lot of differences.

Contribution Amounts

The maximum you can contribute to a Roth IRA in 2020 is $6,000, or $7,000 if you’re age 50 or older. That’s unchanged from 2019.

But Roth 401(k) contributions are potentially more than three times higher!

The employee contribution limit for 2020 for a 401(k) plan is $19,500 per year, or $26,000 if you are age 50 or older (up from $19,000 and $25,000 for 2019). If you participate in a 401(k) plan that also has a Roth 401(k) provision, you could actually contribute up to the maximum 401(k) contribution limit entirely to your Roth 401(k).


 

Now, that doesn’t mean you want to contribute the entire amount to the Roth portion. After all, the Roth 401(k), being a Roth plan, does not offer tax-deductible contributions. $19,500 or $26,000 may be a lot of money to take out of your paycheck without getting a tax break. But it still gives you a lot more room to allocate funds to a Roth plan than what you can with a Roth IRA account.

Employer Matching Contributions

As an employer-sponsored retirement plan, you can also get an employer matching contribution in a Roth 401(k) plan. Since a Roth IRA is a self-directed account, the employer match does not exist.

Though not all employers offer either the Roth 401(k) or even an employer matching contribution, the ones that do may not make a distinction between a regular 401(k) and the Roth portion. In that situation, if the employer offers a 50% match on your contribution, that means there will be a 50% match on the part of your contribution that goes into your Roth 401(k).

There is one limitation on the employer match, however. Since a Roth 401(k) is a fully segregated account in your retirement plan, the employer cannot put matching contributions into that part of your plan. Instead, the employer match goes into your regular 401(k) plan.

That means even if you were to allocate 100% of your 401(k) contribution into the Roth portion, you would still have a regular 401(k) if the employer offers a match.

While it would be an advantage to have the employer match going into the Roth 401(k) as well, that would create a tax problem. Since the employer match is not taxable to you when made, it would be taxable when you begin taking distributions from the plan. For this reason, you’re better off having it in the regular 401(k) portion of your plan, where it will be tax-deferred.

Loan Provisions

Since a Roth 401(k) is part of an employer-sponsored plan, a loan provision may be available on it.

Not all employers offer loan provisions on their 401(k) plans. But if they do, the IRS permits you to borrow up to 50% of the vested balance of your account, up to a maximum of $50,000 Naturally, if you do take the loan against your plan, you will have to make monthly payments, including interest, until the loan is repaid.

Once again, since a Roth IRA is a self-directed plan, no loan provision is available.

Required Minimum Distributions (RMDs)

This is where the Roth IRA and a Roth 401(k) are completely different. IRS required minimum distribution (RMD) rules require you begin taking mandatory distributions from your tax-sheltered retirement plan beginning at age 70 ½. The withdrawals are based on a percentage calculated based on your remaining life expectancy at the age that each distribution is made.

Roth 401(k) plans are subject to RMD provisions. Roth IRA accounts are not.

The benefit of not being required to take RMDs is you can allow your Roth IRA to grow for the rest of your life. This will enable you to leave a larger amount of money to your heirs upon your death.

**A Roth IRA is an excellent strategy to avoid outliving your money. Since RMD’s are not required, the money in a Roth IRA can be available for the later years of retirement, when other plans may have been severely drawn down.

Income Limits

There are no income limits restricting your ability to make Roth 401(k) contributions. As long as you’re participating in the 401(k) plan, you’re able to make contributions to a Roth 401(k).

This is not true with a Roth IRA. If your income exceeds certain limits, you will not be able to make a contribution at all.

For 2020, the Roth IRA income limits look like this:

  • Married filing jointly, or qualifying widow(er) – allowed up to an income of $196,000, partial allowed between $196,000 and $206,000, after which no contribution is allowed.
  • Married filing separately – partial contribution on an income up to $10,000, after which no contribution is allowed.
  • Single, head of household, or married filing separately AND you did not live with your spouse at any time during the year – allowed up to an income of $124,000, partial allowed between $124,000 and $139,000, after which no contribution is allowed.

For 2021, the Roth IRA income limits have been increased slightly, as follows:

  • Married filing jointly, or qualifying widow(er) – allowed up to an income of $196,000, partial allowed between $198,000 and $208,000, after which no contribution is allowed.
  • Married filing separately – partial contribution on an income up to $10,000, after which no contribution is allowed.
  • Single, head of household, or married filing separately AND you did not live with your spouse at any time during the year – allowed up to an income of $124,000, partial allowed between $125,000 and $140,000, after which no contribution is allowed.

Trustee and Investment Selection

This is another area that usually favors Roth IRA plans. As a self-directed account, a Roth IRA can be held with the trustee of your choosing. That means you can decide on an investment platform for the account that meets your requirements for both fees and investment selection. You can choose a platform that charges low fees, as well as offering the widest variety of potential investments.

But with a Roth 401(k), since it’s part of an employer-sponsored plan, gives you no choice as to the trustee. This is one of the biggest issues people have with employer-sponsored plans. The trustee selected by the employer may charge higher than normal fees.


 

They also commonly restrict your investment options. For example, while you might choose a trustee for a Roth IRA that has virtually unlimited investment options, the trustee for a Roth 401(k) may limit you to no more than a half a dozen investment choices.

Which Will Work Better for You?

Fortunately, most people won’t have to make a choice between a Roth IRA and a Roth 401(k). That’s because current law allows you to have both. That is, you can have a 401(k) plan with a Roth 401(k) provision and still fund a Roth IRA. You can do that as long as your income does not exceed the limits to making a Roth IRA contribution.

There’s also a maximum combined limit for contributions to all retirement plans. For 2020, it’s $57,000, or $63,500 if you’re 50 or older. For 2021, it’s $58,000, or $64,000 if you’re 50 or older.

In fact, if you can have both plans then you absolutely should. The Roth 401(k), because it is part of a 401(k) plan in general, provides much higher contribution limits. This will enable you to save a very large amount of money. As well, you always have the choice to allocate some of your 401(k) contribution into a regular 401(k). That means that the portion contributed to the traditional 401(k) will be tax-deductible.

But the big advantage to also having the Roth IRA is that it will provide you with much wider investment options. That means you can make the best of the investment selections offered within your 401(k) plan, but expand your investing activities through your Roth IRA, into whatever investments you choose.

And don’t forget the Roth IRA means you will already have an account in place should you leave your employer, and need an account to transfer your Roth 401(k) into. In addition, you could also do a Roth IRA conversion of the balance that’s in your traditional 401(k) plan.

So if you have the option, take advantage of both the Roth IRA and the Roth 401(k) plan.

The post Roth IRA vs. Roth 401(k) – Choose The Best Plan For You appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Retirement, Taxes

What You Should Do Now to Prepare for Tax Season 2020

tax season 2020

As of December 27, 2019, the IRS had received a whopping 155,798,000 tax returns during the year. A bit over 138 million of those were filed electronically, with almost 60 million electronic tax returns filed by individuals handling their own taxes. Whether you intend to be a self-preparer in 2021 or not, it’s a good idea to prepare for tax season sooner rather than later.

If you want to know how to prepare for tax season early, here are some steps you can take as early as November or December of the previous year:

  1. Gather important tax documents.
  2. Gather information about dependents.
  3. Double-check personal information with your employer.
  4. Plan ahead if you might owe taxes.
  5. Renew your ITIN if necessary.
  6. Start prepping your tax return.
  7. Do research on professional tax preparers.
  8. Finalize contributions for the year.
  9. Stay up-to-date on news from the IRS.

That’s a hefty list, but don’t worry. You can find more details about each of these ways to prepare for tax season 2020 below.

1. Gather Important Documents

You probably know that taxes require a great deal of paperwork. Get organized by starting to gather those documents. You might create a folder or basket where you can store documents until you’re ready to use them. Because many tax documents, including W2s and 1099s, might come electronically, create a digital folder where you can store those documents as well.

Common documents you might need to file your taxes include but aren’t limited to:

  • W2s from employers
  • 1099s from anyone who paid you miscellaneous, contract or other relevant funds
  • Documents showing medical, educational, child care or other expenses, especially if you’re itemizing
  • Statements regarding investments or mortgage interest payments
  • Receipts showing charitable donations
  • Receipts related to deductible expenses

2. Gather Information About Dependents

You’ll need the names and Social Security numbers of relevant dependents to include on your tax returns. If someone else can or might claim one of your dependents on their return, you need to know that. For example, if you’re divorced, it might be a good idea to work out which parent will claim a child or children for the 2020 tax year. You both can’t claim the same child for the same tax year.

3. Double-Check Personal Info With Your Employer

Filing your tax return as soon as possible after the IRS starts processing returns can be a way to get a refund sooner. But you’re often at the mercy of employers and others. Employers must send W2s by the last day of January each year.

Whether your employer sends your W2 early or waits until the last day, you could receive it even later than you would have if your employer doesn’t have the right address. To avoid this issue, check with HR to ensure all of your information is up-to-date.

This is actually a good exercise to practice with other businesses in December. Whether it’s a bank, your IRA provider or your child’s school, if someone is likely to send you tax documents, make sure they have your correct address.

4. Plan Ahead to Pay Taxes

According to the IRS, around $121 billion in taxes were delinquent for fiscal year 2019. One of the best ways to keep yourself out of the delinquent bucket when it comes to taxes is to plan ahead if you think you might owe. Here are a few tips for doing so:

  • Start a savings account to pay for your taxes. If you put money away starting as early as December, you can break a tax debt into smaller chunks and have enough to cover it by the April deadline.
  • Consider maximizing contributions and charitable donations to reduce your taxable income. This might lower the total amount you owe.
  • Estimate how much you might owe. Divide it by the number of weeks until the first week of April. Create a new personal budget that sets that amount aside if you can.
  • Consider consulting with a professional tax attorney or accountant to find out if you can reduce your tax burden in any other ways.

Note that you can file an extension for your return. That means you’ll have until October 15 to file your return. However, that extension doesn’t apply to your tax payment. If you wait until later to pay your taxes, you might still owe penalties and interest.

The IRS allows taxpayers to set up payment plans in some cases. If you’re current on all back taxes or have filed all required returns, you might be able to set up an installment agreement.

5. Renew Your ITIN

If you have an Individual Tax Identification Number (ITIN) used to file returns, you might need to renew it. According to the IRS, ITINs with 88 as the middle number expire December 31, 2020, and must be renewed.

Your ITIN is also set to expire at the end of the year if you haven’t used it on returns since 2016. The IRS further notes that ITINs with middle digits of 90 to 92 or 94 to 99 that were issued before 2013 and never renewed will also expire. If any of these situations apply to you, you’ll need to renew your ITIN.

6. Start Preparing Your Return

Want to get a serious head start and reduce the potential headache and stress of tax season? You can begin preparing your return today. If you use tax preparation software, you can enter as much information as you have right now. As you get information, you can quickly add it into the software. By the time you receive your last W2, you’ll have your taxes done.

While you’re getting ahead of the game, make sure you’re ready to receive a direct deposit of your refund when the time comes. You’ll need a valid bank account to do so.

7. Research Professional Tax Preparers

Don’t feel like you can handle the job on your own? That’s fine too. Consider using this extra time to research potential professionals or tax services that can help you file your taxes. If you choose a tax professional, make sure they have a valid Preparer Tax Identification Number, which indicates they’re authorized to file federal tax returns on behalf of others.

8. Finalize Contributions for the Year

December is a great time to finalize contributions to retirement plans for the year. You can deposit as much as $6,000 into your IRA for 2020. If you’re older than 50, that amount is $7,000 to allow for catch-up contributions. Those contributions can be tax deductible depending on your situation.

Other contributions you might want to look at include:

  • Health savings accounts, which have a maximum contribution limit of $3,500 for individuals and $7,000 for families.
  • 401(k) accounts, which have a maximum contribution limit of $19,500 for 2020 with an extra $6,500 in allowed catch-up contributions for those who are 50 or older.

9. Keep Up with IRS Announcements, Particularly About COVID-19

It’s unclear how COVID-19 may impact tax filing, refunds and payment deadlines in 2021. Make sure you stay up-to-date with the IRS’s news releases in this matter.

While you’re taking some time to prepare for the next tax season early, you might also want to give your financials a close look. If you’re not already keeping close tabs on your credit, now is as good a time as any to pull your reports to check them for accuracy. You can also sign up for a service such as ExtraCredit, which makes it easy to monitor your credit score and access numerous features to build, protect or use your credit.

Try ExtraCredit Today!

The post What You Should Do Now to Prepare for Tax Season 2020 appeared first on Credit.com.

Source: credit.com

Retirement, Taxes

Are Social Security Disability Benefits Taxable?

A disabled woman talks to her accountant about taxes.Social Security benefits, including disability benefits, can help provide a supplemental source of income to people who are eligible to receive them. If you’re receiving disability benefits from Social Security, you might be wondering whether you’ll owe taxes on the money. For most people, the answer is no. But there are some scenarios where you may have to pay taxes on Social Security disability benefits. It may also behoove you to consult with a trusted financial advisor as you navigate the complicated terrain of taxes on Social Security disability benefits.

What Is Social Security Disability?

The Social Security Disability Insurance program (SSDI) pays benefits to eligible people who have become disabled. To be considered eligible for Social Security disability benefits, you have to be “insured”, which means you worked long enough and recently enough to accumulate benefits based on your Social Security taxes paid.

You also have to meet the Social Security Administration’s definition of disabled. To be considered disabled, it would have to be determined that you can no longer do the kind of work you did before you became disabled and that you won’t be able to do any other type of work because of your disability. Your disability must have lasted at least 12 months or be expected to last 12 months.

Social Security disability benefits are different from Supplemental Security Income (SSI) and Social Security retirement benefits. SSI benefits are paid to people who are aged, blind or disabled and have little to no income. These benefits are designed to help meet basic needs for living expenses. Social Security retirement benefits are paid out based on your past earnings, regardless of disability status.

Supplemental Security Income generally isn’t taxed as it’s a needs-based benefit. The people who receive these benefits typically don’t have enough income to require tax reporting. Social Security retirement benefits, on the other hand, can be taxable if you’re working part-time or full-time while receiving benefits.

Is Social Security Disability Taxable? 

This is an important question to ask if you receive Social Security disability benefits and the short answer is, it depends. For the majority of people, these benefits are not taxable. But your Social Security disability benefits may be taxable if you’re also receiving income from another source or your spouse is receiving income.

The good news is, there are thresholds you have to reach before your Social Security disability benefits become taxable.

When Is Social Security Disability Taxable? 

A senior's tax return

The IRS says that Social Security disability benefits may be taxable if one-half of your benefits, plus all your other income, is greater than a certain amount which is based on your tax filing status. Even if you’re not working at all because of a disability, other income you’d have to report includes unearned income such as tax-exempt interest and dividends.

If you’re married and file a joint return, you also have to include your spouse’s income to determine whether any part of your Social Security disability benefits are taxable. This true even if your spouse isn’t receiving any benefits from Social Security.

The IRS sets the threshold for taxing Social Security disability benefits at the following limits:

  • $25,000 if you’re single, head of household, or qualifying widow(er),
  • $25,000 if you’re married filing separately and lived apart from your spouse for the entire year,
  • $32,000 if you’re married filing jointly,
  • $0 if you’re married filing separately and lived with your spouse at any time during the tax year.

This means that if you’re married and file a joint return, you can report a combined income of up to $32,000 before you’d have to pay taxes on Social Security disability benefits. There are two different tax rates the IRS can apply, based on how much income you report and your filing status.

If you’re single and file an individual return, you’d pay taxes on:

  • Up to 50% of your benefits if your income is between $25,000 and $34,000
  • Up to 85% of your benefits if your income is more than $34,000

If you’re married and file a joint return, you’d pay taxes on:

  • Up to 50% of your benefits if your combined income is between $32,000 and $44,000
  • Up to 85% of your benefits if your combined income is more than $44,000

In other words, the more income you have individually or as a married couple, the more likely you are to have to pay taxes on Social Security disability benefits. In terms of the actual tax rate that’s applied to these benefits, the IRS uses your marginal tax rate. So you wouldn’t be paying a 50% or 85% tax rate; instead, you’d pay your ordinary income tax rate based on whatever tax bracket you land in.

It’s also important to note that you could be temporarily pushed into a higher tax bracket if you receive Social Security disability back payments. These back payments can be paid to you in a lump sum to cover periods where you were disabled but were still waiting for your benefits application to be approved. The good news is you can apply some of those benefits to past years’ tax returns retroactively to spread out your tax liability. You’d need to file an amended return to do so.

Is Social Security Disability Taxable at the State Level?

Besides owing federal income taxes on Social Security disability benefits, it’s possible that you could owe state taxes as well. As of 2020, 12 states imposed some form of taxation on Social Security disability benefits, though they each apply the tax differently.

Nebraska and Utah, for example, follow federal government taxation rules. But other states allow for certain exemptions or exclusions and at least one state, West Virginia, plans to phase out Social Security benefits taxation by 2022. If you’re concerned about how much you might have to pay in state taxes on Social Security benefits, it can help to read up on the taxation rules for where you live.

How to Report Taxes on Social Security Disability Benefits

If you received Social Security disability benefits, those are reported in Box 5 of Form SSA-1099, Social Security Benefit Statement. This is mailed out to you each year by the Social Security Administration.

You report the amount listed in Box 5 on that form on line 5a of your Form 1040 or Form 1040-SR, depending on which one you file. The taxable part of your Social Security disability benefits is reported on line 5b of either form.

The Bottom Line

A disabled man in a wheelchairSocial Security disability benefits aren’t automatically taxable, but you may owe taxes on them if you pass the income thresholds. If you’re worried about how receiving disability benefits while reporting other income might affect your tax bill, talking to a tax professional can help. They may be able to come up with strategies or solutions to minimize the amount of taxes you’ll end up owing.

Tips on Taxes

  • Consider talking to a financial advisor as well about how to make the most of your Social Security disability benefits and other income. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help. By answering a few simple questions you can get personalized recommendations for professional advisors in your local area in minutes. If you’re ready, get started now.
  • While you don’t have to reach a specific age to apply for Social Security disability benefits or Supplemental Security Income benefits, there is a minimum age for claiming Social Security retirement benefits. A Social Security calculator can help you decide when you should retire.

Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/JannHuizenga, ©iStock.com/AndreyPopov

The post Are Social Security Disability Benefits Taxable? appeared first on SmartAsset Blog.

Source: smartasset.com

Retirement

5 Options for Your Retirement Account When Leaving a Job

One of the most common retirement questions I receive is what to do with a retirement account when leaving a job. Knowing your options for managing a retirement plan with an old employer is essential because most people change jobs many times throughout their careers. And millions of Americans remain out of work during the pandemic.

When you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave.

Fortunately, when you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave. It doesn't matter if you quit, get fired, or get laid off, the same rules apply. 

This post will cover five options for managing your retirement account when your employment ends. You'll learn the rules for handling a retirement plan at an old job and the best move to create a secure financial future.

Why should you use a retirement account?

Investing money using one or more retirement accounts is wise because they come with terrific tax advantages. They defer or eliminate the tax on your contributions and investment earnings, which may allow you to accumulate a bigger balance than with a taxable brokerage account.

Investing money using one or more retirement accounts is wise. If you have a retirement plan at work but aren't participating in it, now's the time to enroll!

So, if you have a retirement plan at work but aren't participating in it, now's the time to enroll! Contribute as much as you can, even if it's just a small amount. Make a goal to increase your contribution rate each year until you're putting away at least 10% to 15% of your pre-tax income.

FREE RESOURCE: Retirement Account Comparison Chart (PDF)—a handy one-page download to see the retirement account rules at a glance.

What is a retirement account rollover?

Don't make the mistake of thinking that once you leave a job with a 401(k) or a 403(b) you can't continue getting tax breaks. Doing a rollover allows you to withdraw funds from a retirement plan with an old employer and transfer them to another eligible retirement account.

When you roll over a workplace retirement account, you don't lose your contributions or investment earnings. And if you're vested, you don't lose any money that your employer may have put into your account as matching funds.

The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process.

The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process. If you miss this deadline and are younger than age 59½, the transaction becomes an early withdrawal. That means it is subject to income tax, plus an additional 10% early withdrawal penalty.

If you're a regular Money Girl podcast listener or reader, you know that I don't recommend taking early withdrawals from retirement accounts. Paying income tax and a penalty is expensive and reduces your nest egg.

If you complete a traditional rollover within the allowable 60-day window, you maintain all the funds' tax-deferred status until you make withdrawals in the future. And with a Roth rollover, you retain the tax-free status of your funds.

What are your retirement account options when leaving a job?

Once you're no longer employed by a company that sponsors your retirement plan, there are four options for managing the account. 

1. Cash out your account

Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option. As I mentioned, taking an early withdrawal means you must pay income tax and a 10% penalty. 

Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option.

Let's say you have a $100,000 account balance that you cash out. If your average rate for federal and state income taxes is 30%, and you have an additional 10% penalty, you lose 40%. Cracking open your $100,000 nest egg could mean only having $60,000 left, depending on how much you earn.

Note that if your retirement plan has a low balance, such as $1,000 or less, the custodian may automatically cash you out. If so, they're required to withhold 20% for taxes (although you may owe more), file Form 1099-R to document the distribution, and pay you the balance. 

2. Maintain your existing account

Most retirement plans allow you to keep money in the account after you're no longer employed if you maintain a minimum balance, such as more than $5,000. If you don't have the minimum, but you have more than the cash-out threshold, the custodian typically has the authority to deposit your money into an IRA in your name.

The downside to leaving money in an old retirement account is that you can't make additional contributions because you're not an employee. However, your funds can continue to grow there. You can manage them any way you like by selling or buying investments from a set menu of options.

The downside to leaving money in an old retirement account is that you can't make additional contributions.

Leaving money in an old retirement plan is certainly better than cashing out and paying taxes and a penalty, but it doesn't give you as much flexibility as you you would get with the next two options I'm going to talk about.

I only recommend leaving money in an old employer's retirement plan if you're happy with the investment choices and the fund and account fees are low. Just make sure that the plan doesn't charge you higher fees once you're no longer an active employee.

Another reason you might want to leave retirement money in an old employer's plan is if you're unemployed or have a job that doesn't offer a retirement account. I'll cover some special legal protections you'll get in just a moment.

3. Rollover to an Individual Retirement Arrangement (IRA)

Another option for your old workplace retirement plan is to roll it into an existing or new traditional IRA. If you have a Roth 401(k) or 403(b), you can roll it over into a Roth IRA. The deadline to complete an IRA rollover is 60 days.

Your earnings in a traditional IRA would continue to grow tax-deferred, just like in your old workplace plan. And earnings grow tax-free in a Roth IRA, like a Roth account at work. 

Here are a couple of advantages to moving a workplace plan to an IRA:

  • Getting more control. You choose the financial institution and the investments for your IRA.  
  • Having more flexibility. With an IRA, there are more ways to tap your funds before age 59½ and avoid an early withdrawal penalty than with a workplace account. That rule applies to several exceptions, including using withdrawals for medical bills, college expenses, and buying or building your first home.

Here are some downsides to rolling over a workplace plan to an IRA:

  • Having fewer legal protections. Depending on your home state, assets in an IRA may not be protected from creditors.  
  • Being ineligible for a Roth IRA. When you're a high earner, you may not be allowed to contribute to a Roth IRA. However, you can still manage the account and have tax-free investment earnings.

If you want more control over your investment choices, think you'll need to make withdrawals before retirement, are self-employed, or don't have a job with a retirement plan to roll your account into, having an IRA is a great option.

4. Rollover to a new workplace plan

If you land a new job with a retirement plan, it may allow a rollover from your old plan once you're eligible to participate. While the IRS allows rollovers into most retirement accounts, employer plans aren't required to accept incoming rollovers. So be sure to check with your new plan administrator about what's possible. 

Once you initiate a transfer from one workplace plan to another, you must complete it within 60 days to avoid taxes and a penalty.

Here are some advantages of doing a workplace-to-workplace rollover:

  • More convenience. Having all your retirement savings in one place may make it easier to manage and track.  
  • Taking early withdrawals. Retirees can begin taking penalty-free withdrawals from workplace plans as early as age 55.  
  • Avoiding Roth income limits. Unlike a Roth IRA, there are no income restrictions for participating in a Roth workplace retirement account.  
  • Getting more legal protections. Workplace retirement plans are covered by the Employee Retirement Income Security Act of 1974 (ERISA), a federal regulation. It doesn't allow creditors (except the federal government) to touch your account balance.

Some downsides to transferring money from one workplace plan to another include:

  • Having less flexibility. You can't take money out of a 401(k) or a 403(b) until you leave the company or qualify for an allowable hardship. It doesn't come with as many withdrawal exceptions compared to an IRA. 
  • Getting less control. You may have fewer investment choices or higher fees than an IRA, depending on the brokerage firm. 

5. Rollover to an account for the self-employed

If you left a job to become self-employed, having an IRA is a great option. However, there are other types of retirement accounts that you might consider, such as a solo 401(k) or a SEP-IRA, based on whether you have employees and on your business income. 

Read 4 Ways to Start a Retirement Account as a Self-Employed Freelancer or 5 Retirement Options When You're Self-Employed for more information. 

When is a Roth rollover allowed?

For a rollover to be tax-free, you must use a like account. For example, if you have a traditional 403(b), you must rollover to another traditional retirement account at work or to a traditional IRA.

If you move traditional, pre-tax funds into a post-tax, Roth account, you must pay income tax on any amount that wasn't previously taxed. That could leave you with a massive tax liability. If you want a Roth, a better move would be to open a Roth account at your new job or to start a Roth IRA (if your income doesn't make you ineligible to contribute). 

Where should you move an old retirement account?

The best place for your old retirement account depends on the flexibility and legal protections you want. Other considerations include the quality of your old plan, your income, and whether you have a new job with a retirement plan that accepts rollovers.

The best place for your old retirement account depends on the flexibility and legal protections you want.

The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options. If you have questions about doing a rollover, get advice from your retirement plan custodian. They can walk you through the process to make sure you choose the best investments and don't break the rollover rules.

Source: quickanddirtytips.com

Home Ownership, Retirement

7 Things You Need to Know About a Simple IRA

Most people have never heard of a SIMPLE IRA and are curious to know how it differs from a 401(k).

A SIMPLE IRA stands for Savings Investment Match Plan for Employees.

Table of Contents

  • Getting started with a SIMPLE IRA
  • 7 Things You Should Know About the SIMPLE IRA
  • Setting Up a SIMPLE IRA and Maintaining Filing Requirements
  • Where Can I Open a SIMPLE IRA?

Getting started with a SIMPLE IRA

One of the key differences of why your employer may offer a SIMPLE IRA versus a 401(k), is that SIMPLE IRAs are geared for employers with less than a 100 employees.

In addition to that, the administrative cost of a SIMPLE IRA for your employer is considerably much less than what a 401(k) would be.

These are the common reasons why you might see an employer offering a SIMPLE IRA versus a 401(k).

7 Things You Should Know About the SIMPLE IRA

1.  Your Employers Contributions are 100% Vested.

With most 401(k)s you must work for the employer for a certain number of years to be vested.  This means if you were to leave that employer you could take that employer’s matching contribution with you.  But with the 401(k) you have anywhere from three to five years before you’ve satisfied the 401(k) vesting schedule, which is different with SIMPLE IRA.

With the SIMPLE IRA, you are 100% vested whenever the employer deposits that into your account.

This is definitely a huge difference than the 401(k). Both you and any employees you have enjoy immediate vesting, not only of your own contributions to the plan, but also of matching contributions on the employer side.

2. Employers Have To Match in a SIMPLE IRA

Each year, the employer is required to make a contribution to your SIMPLE IRA account whether it be in the form of a match or what’s called a non-elected contribution.  Matching contribution states that the employer has to match at least what you match.  So, if you’re matching 3%, the employer has to match 3% as well.  Note that 3% is the most that the employer has to match, which could be considerably different than compared to a 401(k).

So, if you’re matching 3%, the employer has to match 3% as well. Note that 3% is the most that the employer has to match, which could be considerably different compared to a 401(k).

The employer does have the option to reduce the matching amount to 1% for two of a five year period.  What that means is that if the employer does do this, that they have to match the full 3% for the remaining three of those five years.  The calculation can be a little tricky, but know that your employer is matching no matter what.

If the employer chooses to not match, they may do a “non-elect contribution”. That means they will contribute 2% of your salary.  Even if you are contributing 3% of your salary, they will only contribute the 2%.

3. Employees Control the Investments

With most 401(k)s, you are limited to the investment options that your employer provides you.  This is considerably different when compared to the SIMPLE IRA.  Being a self-employed retirement plan, the SIMPLE IRA gives you the discretion of what exactly you want your money invested into.  If you want to buy individual stocks, mutual funds, ETFs, or CDs, you are allowed.  This is the same feature that a SEP IRA offers.

The investment control factor plays out in two ways:

  • Employee choice of investment trustee. You can designate the plan so that the employee chooses his or her own financial institution to hold the plan. That not only gives greater choice to the employees, but it also relieves you, as the employer, of the burden of managing the entire plan for everyone.
  • Self-directed investing. Participants not only choose the financial institution, but they are also free to engage in do-it-yourself investing. That means they can choose how the money is invested, where it’s invested, as well as the level of risk that they are willing to assume.

4. Employees can contribute 100% of income into a SIMPLE IRA.

You are allowed to contribute up to $13,500 in 2020 and 2021, up from $13,000 in 2019, per year in a SIMPLE IRA.  If you’re over the age of 50, you’re allowed a catch-up contribution, which remains at $3,000.  Please note that the $13,500 (or $16,500) is far less than the amount that you are eligible to contribute to a 401(k).

Nor is it as high as the (up to) $58,000 that you could contribute to either a SEP IRA or a Solo 401(k).

But the SIMPLE IRA contribution limit is more than two times as high as the contribution limit for a traditional or Roth IRA. And the contribution limit for people 50 or older is almost 2 ½ times higher than the $7,000 limit for traditional and Roth IRAs.

The 100% feature of the SIMPLE IRA means that the employee can contribute virtually all of their income to the plan, up to the maximum contribution. That means that if an employee earns $30,000, they can contribute the first $13,500 of their income into the plan (or $16,500 if they’re 50 or older). There is no percentage limitation on the contribution, only the dollar amount.

Yes, it’s true that you can contribute more to other plans, like the SEP IRA or the Solo 401(k). But your business will have to have a relatively high income to reach those levels, since both are percentage based.

But if your self-employment income is less than $100,000 per year, you might find the simplicity of the SIMPLE IRA to be the better choice for your business.

For example, SIMPLE IRAs don’t require filing special reports with the IRS. They also aren’t subject to discrimination and top-heavy testing. It’s more of a group IRA than anything else. And for a small business, simple is a definite advantage.

5. SIMPLE IRA’s Do Not Allow Loans

A lot of 401(k)s have loan provisions that allow the employee to borrow against their money if need be.  With SIMPLE IRAs, this is not the case.  Keep that in mind if you’re thinking that this might be a last resort place to draw money out.

The reason this is true is because a SIMPLE IRA is first and foremost an IRA. And just as you cannot borrow money from a traditional or a Roth IRA, you also can’t borrow from a SIMPLE IRA. That’s probably not a bad thing either. The most important function of any retirement plan is giving you the ability to create a tax-sheltered investment portfolio for your retirement. Since you won’t be able to borrow against a SIMPLE IRA, you’ll be forced to keep the plan for its primary intended purpose.

6. The SIMPLE IRA Two-year Rule.

This is something that should be definitely noted within the SIMPLE IRA.  Most retirement plans — 401(k)s, regular IRAs, or Roth IRAs, etc. — have the 10% early withdrawal penalty if under the age of 59.5.  But with the SIMPLE IRA, it takes it one step further.

If the SIMPLE IRA that you’ve started is less than two years and you cash it out, instead of the normal 10% penalty, you will be subject to a 25% penalty in addition to ordinary income tax.

Do not overlook this.  Keep in mind that doesn’t apply to just cashing it out.  If you were attempting to rollover your SIMPLE IRA into a rollover IRA, the 25% penalty would apply as well.  Remember to just wait the two years before converting into either a regular IRA or cashing it out.

7. The 2020 Contributions Are the Same in 2021

The contribution limit for 2020 and 2021 remains the same at $13,500. The catch-up contribution limit, also remains the same at $3,000. That means that for somebody that turns 50 in the year 2020 or 2021, and has access to a Simple IRA, can contribute a total of $16,500.

Setting Up a SIMPLE IRA and Maintaining Filing Requirements

Setting up a SIMPLE IRA is only a little bit more complicated than setting up a traditional or Roth IRA. You start by selecting a financial institution (which we’ll cover below), and then following three steps:

  1. Execute a written agreement to provide benefits to all eligible employees
  2. Give employees certain information about the agreement
  3. Set up an IRA account for each employee

The written agreement can be completed using IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. (5304 is used if each participant will choose their own financial institution. A 5305 is used if you will designate the financial institution for the entire plan).

Neither form is required to be filed with the IRS, but you should keep a completed copy of the form on file, including all relevant signatures. You could also use a pro forma provided by the financial institution that you will be using to hold the plan. It will accomplish the same purpose.

You’ll need to provide an annual notice to eligible employees at the beginning of the election period (or provide each with a copy of either the completed 5304 or 5305 form). That will notify each employee of the following:

  1. The employee’s opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
  2. The employees’ ability to select a financial institution that will serve as trustee of the employees’ SIMPLE IRA, if applicable;
  3. Your decision to make either matching contributions or nonelective contributions;
  4. A summary description (the financial institution should provide this information); and
  5. Written notice that the employee can transfer his or her balance without cost or penalty if you are using a designated financial institution.

The plan must be set up by or for each eligible employee, and all contributions to the plan must go into it. The plan must be established between January 1 through October 1 of the year. Unfortunately, a SIMPLE IRA cannot have a Roth provision, as would be possible with a 401(k) plan.

Where Can I Open a SIMPLE IRA?

A SIMPLE IRA can be opened through a wide number of potential trustees. These can include banks, investment brokerage firms, mutual fund families, and managed investment account brokers. The process is easy and comparable to opening up either a traditional or a Roth IRA.

For whatever reason, there are fewer investment brokerage firms that accept SIMPLE IRA plans, than other types of IRAs, like traditional, Roth, rollover, and even SEP plans. Below are two investment brokers that we have reviewed (or use), and recommend as a trustee for your plan.

TD Ameritrade

We’ve done a full review of TD Ameritrade and recommend it as a good trustee for a SIMPLE IRA plan. Like many other large brokers, they’ve eliminated trading fees on stocks, exchange traded funds (ETFs) and options. And they have a strong IRA capability in general. They’re a diversified broker, offering stocks, options, mutual funds, ETF’s, futures, Forex, bonds and even certificates of deposit.

Not only do they have excellent customer service, but they also have more than 100 branches located nationwide, in case you prefer face-to-face contact. They also have a Retirement Calculator tool, that analyzes your personal information, goals, income, assets, and risk tolerance, and then shows you how to reach your goals, as well as track your progress.

They also offer more than 100 ETF’s that you can trade for free. All around, TD Ameritrade is an excellent platform to host a SIMPLE IRA plan, or any other type of IRA account.

E*TRADE

We’ve also reviewed E*TRADE, and in doing so we’ve rated it as the best investment platform for active traders. The platform offers free independent research, streaming real-time quotes, customizable planning tools everything that you need for do-it-yourself investing.

At $0 per trade, they’re one of the best in the industry on pricing. But they also offer more than 2,700 no-load, no transaction fee mutual funds. And since they offer virtually every other type of investment or retirement plan, you can use E*TRADE to hold all of your accounts with one brokerage.

E*TRADE is well recognized in regard customer service, which can be reached by phone 24 hours a day. They also offer as much or as little account assistance as you need. And if you want a fully managed account, E*TRADE offers that through their E*TRADE Capital Management arm. That will even enable you to have your SIMPLE IRA plan split between a self-directed portion, and a professionally managed portion.

The post 7 Things You Need to Know About a Simple IRA appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Financial Advisor, Find An Apartment, Investing, Personal Finance, Retirement

How To Retire At 50: 10 Easy Steps To Consider

Can you retire at 50? On average, people usually retire at 65. But what if you want to retire 15 years earlier than that like  at 50? Is it doable? Below are 10 easy steps to take to retire at 50.  Retiring early can be challenging. Therefore, SmartAsset’s free tool can match you with  a financial advisor who can help to work out and implement a retirement income strategy for you to maximize your money.

10 Easy & Simple Steps to Retire at 50:

1. How much you will need in retirement.

The first thing to consider is to determine how much you will need to retire at 50. This will vary depending on the lifestyle you want to have during retirement. If you desire a lavish one, you will certainly need a lot.

But according to a study by SmartAsset, 500k was found to be enough money to retire comfortably. But again that will depends on several factor.

For example, you will need to take into account where you want to live, the cost of living, how long you expect to live, etc.

Read: Can I Retire at 60 With 500k? Is It Enough?

A good way to know if 500k is possible to retire on is to consider the 4% rule. This rule is used to figure out how much a retiree should withdraw from his or her retirement account.

The 4% rule states that the money in your retirement savings account should last you through 30 years of retirement if you take out 4% of your retirement portfolio annually and then adjust each year thereafter for inflation.

So, if you plan on retiring at 50 with 500k for 30 years, using the 4% rule you will need to live on $20,000 a year. 

Again, this is just an estimation out there. You may need less or more depending on the factors mentioned above. For example, if you’re in good health and expect to live 40+ years after retiring at 50, $500,000 may not be enough to retire on. That’s why it’s crucial to work with a financial advisor.

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2. Maximize your tax-advantaged retirement accounts.

Once you have an idea of how much you need in order to retire at 50, your next step is to save as much as possible at a faster rate. If you are employed and you have a 401k plan available to you, you should definitely participate in it. Nothing can grow your retirement savings account faster than a 401k account.

See: How to Become a 401k Millionaire.

That means, you will need to maximize your 401k contributions, for example. In 2020, and for people under 50, the 401k contribution limit is $19,500.  Also, take advantage of your company match if your employee offers a match.

In addition to the maximum contribution of $19,500, your employer also contributes. Sometimes, they match dollar for dollar or 50 cents for each dollar the worker pays in.

In addition to a 401k plan, open or maximize your Roth or traditional IRA. For an IRA, it is $6,000. So, by maximizing your retirement accounts every year, your money will grow faster.

3. Invest in mutual or index funds. Apart from your retirement accounts (401k, Roth or Traditional IRA, SEP IRA, etc), you should invest in individual stocks or preferably in mutual funds. 

4. Cut out unnecessary expenses.

Someone with the goal of retiring at 50 needs to keep an eye on their spending and keep them as low as possible. We all know the phrase, “the best way to save money is to spend less.”

Well, this is true when it comes to retiring 15 years early than the average.  So, if you don’t watch TV, cancel Netflix or cable TV. If your cell phone bill is high, change plans or switch to another carrier. Don’t go to lavish vacations.

5. Keep an eye on taxes.

Taxes can eat away your profit. The more you can save from taxes, the more money you will have. Retirement accounts are a good way to save on taxes. Besides your company 401k plan, open a Roth or Traditional IRA.

6. Make more money.

Spending less is a great way to save money. But increasing your income is even better. If you need to retire at 50, you’ll need to be more aggressive. And the more money you earn, the more you will be able to save. And the faster you can reach your early retirement goal.

7. Speak with a financial advisor

Consulting with a financial advisor can help you create a plan to. More specifically, a financial advisor specializing in retirement planning can help you achieve your goals of retiring at 50. They can help put in a place an investment strategy to put you in the right track to retire at 50. You can easily find one in your local area by using SmartAsset’s free tool. It matches users with financial advisors in just under 5 minutes.  

8. Decide how you will spend your time in retirement.

If you will spend a lot of time travelling during retirement, then make sure you do research. Some countries like the Dominican Republic, Mexico, Panama, the Philippines, and so many others are good places to travel to in retirement because the cost of living is relatively cheap.

While other countries in Europe can be very expensive to travel to, which can eat away your retirement money.  If you decide to downsize or sell your home, you can free up more money to spend.

9. Financing the first 10 years.

There is a penalty of 10% if you cash out your retirement accounts before you reach the age of 59 1/2. Therefore, if you retire at 50, you’ll need to use money in other accounts like traditional savings or brokerage accounts. 

10. Put your Bonus, Raise, & Tax Refunds towards your retirement savings. 

If retiring at 50 years old is really your goal, then you should put all extra money towards your retirement savings. That means, if you receive a raise at work, put some of it towards your savings account.

If you get a tax refund or a bonus, use some of that money towards your retirement savings account. They can add up quickly and make retiring at 50 more of a reality than a dream.

Retiring at 50: The Bottom Line: 

So can I retire at 50? Retiring at 50 is possible. However, it’s not easy. After all, you’re trying to grow more money in less time. So, it will be challenging and will involve years of sacrifices, years living below your means and making tough financial decisions. However, it will be worth it in the long run. 

Read More:

  • How Much Is Enough For Retirement
  • How to Grow Your 401k Account
  • People Who Retire Comfortably Avoid These Financial Advisor Mistakes
  • 5 Simple Warning Signs You’re Definitely Not Ready for Retirement

Speak with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning to retire at 50, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

The post How To Retire At 50: 10 Easy Steps To Consider appeared first on GrowthRapidly.

Source: growthrapidly.com