How To Avoid A 401(k) Meltdown If The Trump Rally Fizzles

Millions of Americans are asking the wrong questions when it comes to their retirement plans. It’s not “how much should I invest now?” or “is the market safe?” You should invest as much as you can in every kind of market.

So forget about the question of whether the “Trump rally” is over, or taking a pause. If that’s your concern, you’re focused on the wrong thing.

Despite this reality, far too many investors are trying to find the right fund manager who can somehow predict and navigate the rocky seas the market will toss up. In rare cases, some managers get lucky and get in and out at the right time. But most don’t have this ability.

Most of us want to believe that professional money managers know just when to get in and out of stocks. We put a lot of faith in them — and mis-spend some $2 trillion in fees hoping that they’ll be right and protect our money.

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The numbers don’t lie, however. Most managers can’t do better than passive market averages and rarely outperform after you subtract their fees. So if you’re placing your trust in active management, you’re headed for a meltdown sooner or later.

A recent study by Jeff Ptak at Morningstar shows the folly of active management for most investors.

Ptak looked a the relationship between what actively managed funds return to the fees they charge for management. In most cases, expenses will cancel out most significant gains.

“Fees haven’t fallen that steeply, and, as a result more than two-thirds of U.S. stock funds levy annual expenses that would wipe out their estimated future pre-fee excess returns.”

What this means is that active managers who time the market aren’t likely to outperform passive baskets of stocks. When you subtract their fees, you’re not coming out ahead.

Fees take an even bigger bite when overall market returns are lower. If stocks return less than double digits, you’re going to feel the pain even more.

Ptak is blunt in his conclusion: “Many active stock funds are too expensive to succeed. The exceptions are small-cap funds, where it appears fees are still below estimated pre-fee excess returns.”

What can you do to avoid the meltdown of overpriced, actively managed funds? It’s a pretty simple process.

1) Find the lowest-cost index funds to cover U.S. and global stocks and bonds. Expense ratios shouldn’t be more than 0.20% annually (as opposed to 1% or more for active funds).

2) If you still want active funds in your portfolio, they should be highly-rated managers who invest in smaller companies.

3) Make sure that the “active” part of your portfolio is no more than 30% of your total holdings. While this is an arbitrary percentage, it will provide some buffer against market timing decisions.

You should also avoid the error of picking funds based on their past performance, which can never be guaranteed. So, instead of asking how they performed, you should ask “how many securities can they hold for the lowest-possible cost.”

 

29 Biggest Tax Problems For Married Couples

Preparing your annual income tax return is a chore. It’s even more complex when you’re married. You might have two sets of income, assets, debts and deductions. Further, if you were separated, widowed or divorced during the year, you might have a thorny tax situation.

A qualified accountant can advise you on the basic tax problems that married couples face. For a brief introduction, read through to see 29 of the most significant tax problems married people might encounter. Understanding these challenges can help you get more tax breaks this year.

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1. YOU’RE NOT SURE OF THE YOUR MARITAL STATUS FOR THE TAX YEAR

When preparing taxes, you first need to determine your marital status. It might seem like a straightforward task. However, life is not always so simple.

The IRS considers you to be married if you were lawfully wed on the last day of the tax year. For example, if you tied the knot at any time in the past and were still married on Dec. 31, 2016, you were married to your spouse for the entire year in the eyes of the IRS. The laws of the state where you live determine whether you were married or legally separated for the tax year.

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2. YOU’RE NOT SURE OF YOUR MARITAL STATUS IN A SAME-SEX RELATIONSHIP

Married, same-sex couples are treated the same as married, heterosexual couples for federal tax purposes. However, same-sex couples in a registered domestic partnership or civil union cannot choose to file as married couples, as state law doesn’t consider those types of couples to be married.

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3. YOU DON’T KNOW WHICH FILING STATUS TO CHOOSE

If you weren’t married on Dec. 31 of the tax year, the IRS considers you to be single, head of household or a qualified widow(er) for that year.

If you were married, there are three filing possibilities:

  • Married filing jointly
  • Married filing separately
  • Head of household

If more than one category might apply to you, the IRS permits you to pick the one that lets you pay the least amount in taxes.

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4. YOU CAN’T DECIDE WHETHER TO FILE JOINTLY OR SEPARATELY

If you’re married and don’t qualify to file as head of household, you typically have two choices: filing jointly or separately. It’s best to choose the one that allows you to pay the least amount in taxes, which all comes down to your particular circumstances.

Sometimes it makes sense to file separately, said Josh Zimmelman, owner of Westwood Tax & Consulting, a New York-based accounting firm. “A joint return means that your finances are linked, so you’re both liable for each other’s debts, penalties and liabilities,” he said. “So if either of you has some financial issues or baggage, then filing separately will better protect your spouse from your bad record, or vice versa.”

If you file jointly, you can’t later uncouple yourselves to file married filing separately. “On the other hand, if you file separate returns and then realize you should have filed jointly, you can amend your returns to file jointly, within three years,” Zimmelman said.

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5. YOU ASSUME MARRIED FILING JOINTLY IS ALWAYS THE BEST OPTION

Even if married filing jointly has been your best choice in the past, don’t assume it will always be that way. Do the calculations each year to determine whether filing singly or jointly will give you the best tax result.

Changes in your personal circumstances or new tax laws might make a new filing status more desirable. What was once a marriage tax break might turn into a reason to file separately, or vice versa.

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6. YOU’RE NOT CLEAR ABOUT HEALTHCARE REQUIREMENTS

The Patient Protection and Affordable Care Act — more commonly known as “Obamacare” — requires that you and your dependents have qualifying health care coverage throughout the year, unless you qualify for an exemption or make a shared responsibility payment.

Even if you lose your health insurance coverage because of divorce, you still need continued coverage for you and your dependents during the entire tax year.

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7. YOU CHANGED YOUR LAST NAME

If you want to change your last name after a marriage or divorce, you must officially inform the federal government. Your first stop is the Social Security Administration. Your name on your tax return must match your name in the SSA records. Otherwise, your tax refund might be delayed due to the mismatched records. Also, don’t forget to update the changed names of any dependents.

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8. YOUR SPOUSE DIED DURING THE TAX YEAR

If your spouse died during the year, you’ll need to figure out your filing status. If you didn’t marry someone else the same year, you may file with your deceased spouse as married filing jointly.

If you did remarry during that tax year, you and your new spouse may file jointly. However, in that case, you and your deceased spouse must file separately for the last tax year of the spouse’s life.

In addition, if you didn’t remarry during the tax year of your spouse’s death, you might be able to file as qualifying widow(er) with dependent child for the following two years if you meet certain conditions. This entitles you to use joint return tax rates and the highest standard deduction amount.

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9. YOU FILE JOINTLY AND YOU’RE BOTH LIABLE

If you use the status married filing jointly, each spouse is jointly and severally liable for all the tax on your combined income, said Gail Rosen, a Martinsville, N.J.-based certified public accountant. “This means that the IRS can come after either one of you to collect the full amount of the tax,” she said.

“If you are worried about your spouse and being responsible for their share of their taxes — including interest and penalties — then you might consider filing separately,’ she said.

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10. YOU FILE SEPARATELY AND LOSE TAX BENEFITS

Although filing separately might protect you from joint and several liabilities for your spouse’s mistakes, it does have some disadvantages.

For example, people who choose the married filing separately status might lose their ability to deduct student loan interest entirely. In addition, they’re not eligible to claim the Earned Income Tax Credit and they might also lose the ability to claim the Child and Dependent Care Credit or Adoption Tax Credit, said Eric Nisall, an accountant and founder of AccountLancer, which provides accounting services to freelancers.

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11. YOU DON’T MEET THE MEDICAL EXPENSE DEDUCTION THRESHOLD

To include non-reimbursed medical and dental expenses in itemized deductions, the expenses must meet a threshold of exceeding 10 percent of your adjusted gross income. However, when you file jointly — and thus report a larger combined income — it can make it more difficult for you to qualify.

A temporary exception to the 10 percent threshold for filers ages 65 or older ran through Dec. 31, 2016. Under this rule, individuals only need to exceed a lower 7.5 percent threshold before they are eligible for the deduction. The exception applies to married couples even if only one person in the marriage is 65 or older.

Starting Jan. 1, 2017, all filers must meet the 10 percent threshold for itemizing medical deductions, regardless of age.

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12. YOU DON’T TAKE ADVANTAGE OF THE MARRIAGE BONUS

Many people complain about the marriage tax penalty. “Married filing jointly may result in a higher tax bill for the couple versus when each spouse was filing single, especially if both spouses make roughly the same amount of income,” said Andrew Oswalt, a certified public accountant and tax analyst for TaxAct, a tax-preparation software company.

However, you might have an opportunity to pay less total tax — a marriage tax break — if one spouse earns significantly less. “When couples file jointly with largely differing income levels, this may result in a ‘marriage tax benefit,’ potentially resulting in less tax owed than when the spouses filed with a single filing status,” Oswalt said.

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13. YOU’RE DIVORCED BUT STILL NEED TO FILE A FINAL MARRIED RETURN

If your divorce became official during the tax year, you need to agree with your ex-spouse on your filing status for the prior year when you were still married. As to whether you should file your final return jointly or separately, there is no single correct answer. It partially depends on your relationship with your ex-spouse and whether you can agree on such potentially major financial decisions.

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14. YOU HAVE TO DETERMINE THE STATUS OF DEPENDENTS AFTER A DIVORCE

Tax laws about who qualifies as a dependent are quite complex. Divorcing parents might need to determine which parent gets to claim the exemption for dependent children.

Normally, the custodial parent takes the deduction, Zimmelman said. “So if your child lives with you more than half the year and you’re paying at least 50 percent of their support, then you should claim them as your dependent,” he said.

In cases of shared custody and support, you have a few options. “You might consider alternating every other year who gets to claim them,” said Zimmelman. Or if you have two children, each parent can decide to claim one child, he said.

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15. YOU DEDUCT VOLUNTARY ALIMONY PAYMENTS

If you want to deduct alimony payments you made to a former spouse, it must be in accordance with a legal divorce or separation decree. You can’t deduct payments you made on a voluntary basis.

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16. YOU DEDUCT CHILD SUPPORT PAYMENTS

Even if you don’t take the standard deduction and instead itemize your deductions, you can’t claim child support payments you paid to a custodial parent.

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17. YOU CLAIM CHILD SUPPORT PAYMENTS AS INCOME

Do not report court-ordered child support payments as part of your taxable income. You don’t need to report it anywhere on your tax return. On the other hand, you must report alimony you receive as income on line 11 of your Form 1040.

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18. YOU DON’T CLAIM ALIMONY YOU PAID AS A DEDUCTION

Unlike child support that isn’t tax deductible, you are permitted to deduct court-ordered alimony you paid to a former spouse. It’s a deduction you can take even if you don’t itemize your deductions.

Make sure you include your ex-spouse’s Social Security number or individual taxpayer identification number on line 31b of your own Form 1040. Otherwise, you might have to pay a $50 penalty and your deduction might be disallowed.

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19. YOUR SPOUSE DOESN’T WORK AND MISSES TAX SAVINGS

Saving for retirement is important. Contribute to a 401k plan and you will both save money for your golden years and lower your taxable income now. If your employer offers a 401k plan, you can contribute money on a pretax basis, subject to certain limits.

However, nonworking spouses can’t contribute to a 401k because they don’t have wages from an employer.

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20. YOU MISS QUARTERLY TAX PAYMENTS

Single or married, you might have to pay quarterly tax payments to the IRS, especially if you are self-employed. Make sure you know how to calculate estimated taxes. If you are required to make such payments but do not do so, you might have to pay an underpayment penalty, Rosen said.

All taxpayers must pay in taxes during the year equal to the lower of 90 percent of the tax owed for the current year, or 100 percent — 110 percent for higher-income taxpayers — of the tax shown on your tax return for the prior year, Rosen said. “The problem for married couples is that often they do not realize they owe more taxes due to the combining of the two incomes,” she said.

You should be proactive each year. “To avoid owing the underpayment penalty, make sure to do a projection of your potential tax for 2017 when you finish preparing your 2016 taxes,” she said, adding that you should make sure to comply with the payment rules outlined above.

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21. YOU PHASE OUT OF PASSIVE LOSSES

Crystal Stranger — a Los Angeles-based enrolled agent, president of 1st Tax and author of “The Small Business Tax Guide” — said she sees a lot of married couples who have issues with passive loss limitation rules.

“With these rules, if you have a passive loss from rental real estate or other investments, you are allowed to take up to $25,000 of passive losses against your other income,” she said. “But this amount phases out starting at $100,000 (of) adjusted gross income, and is fully lost by $150,000 (of) adjusted gross income.”

Married filers lose out, as the phaseout amount is the same for a single taxpayer as for a married couple. “This is a big marriage penalty existing in the tax code,” Stranger said. “It gets even worse if a married couple files separately. The phaseout then starts at $12,500, meaning almost no (married filing separately) filers will qualify.”

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22. YOU CLAIM A CHILD AS A DEPENDENT, BUT YOUR INCOME IS HIGH

You are not obligated to claim your kids as dependents on your own tax return. In fact, it might be beneficial not to claim them.

“High earners lose the personal exemption after crossing certain income thresholds,” said Nisall. So in some cases, it might make more sense to let working children claim the exemption for themselves on their own return, he said.

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23. YOU MISS OUT ON THE CHILD TAX CREDIT

Married couples might be able to claim the Child Tax Credit up to a limit of $1,000 for each qualifying child.

“The Child Tax Credit phases out starting at $55,000 for couples electing to use the married filing separately filing status, and (at) $110,000 for those choosing the married filing jointly status,” said Oswalt. “But married couples receive twice the standard deduction that individuals receive, so the phaseout limitations may not negatively impact a married couple’s return if they choose to file jointly.”

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24. YOU NEGLECT THE TAX BREAK FROM A HOME SALE

The IRS provides a tax break when you sell your home, subject to certain conditions. Generally, you must meet a minimum residency period by owning and living in the house for two of the five years previous to the sale.

A single person who owns a home that has increased in value can qualify to exclude up to $250,000 in gains from income, said Oswalt. However, married people can exclude up to $500,000 in gains. This rule can become tricky if one person in the couple purchased the house prior to marriage.

“If you are married when you sell the house, only one of you needs to meet the ownership test for the $250,000 exclusion,” Oswalt said. “You both must meet the residency period to exclude up to the full $500,000 of gain from your income, however.”

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25. YOU DON’T CLAIM THE CHILD AND DEPENDENT CARE CREDIT

Married tax filers might be eligible for the Child and Dependent Care Credit if they paid expenses for the care of a qualifying individual so that they could work or look for work. The rules for who can be a dependent and who can be a care provider are strict. This credit is not available if you file separately.

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26. YOU CAN’T DEDUCT STUDENT LOAN INTEREST

If you’re paying back student loans, you might be looking forward to taking the student loan interest deduction. However, if you’re married, it might not be so easy to do that.

“For a single filer, the deduction begins to phase out when the taxpayer’s adjusted gross income is greater than $65,000,” said Oswalt. “This amount is doubled to $130,000 when filing jointly.”

“So if both spouses are making $65,000 or less, then their deduction will not be affected by the phaseout,” he explained. “However, if one is making $60,000 and the other $75,000, the deduction begins to phase out, which will ultimately result in a larger tax bill.”

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27. YOU INCORRECTLY ACCOUNT FOR GAMBLING WINS AND LOSSES

Imagine a married couple where both spouses like to gamble in Las Vegas. He’s not so lucky and has losses, while she has winnings. If they file a joint return, they might have to report the gambling winnings as taxable income. Meanwhile, the losses might be deductible if the couple itemizes their deductions instead of taking the standard deduction.

However, they can’t take the amount of gambling winnings, subtract the losses and claim the net amount as winnings. Instead, they must report the entire amount of gambling winnings as income, whereas the losses are reported as an itemized deduction up to the amount of the winnings. The IRS requires you to keep accurate records of your winnings and losses.

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28. YOU BECAME A VICTIM OF TAX IDENTITY THEFT

Identify theft is a financial nightmare, no matter how it happens. Tax identity theft happens when someone files a tax return using one or both of the spouse’s Social Security numbers in hopes of scooping up your legitimate refund. If this happens to you, “contact the IRS immediately and fill out an identity-theft affidavit,” said Zimmelman. “You should also file a complaint with the Federal Trade Commission, contact your banks and credit card companies, and put a fraud alert on your and your spouse’s credit reports.”

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29. YOU CAN’T GET YOUR 2015 RETURN

The IRS and state tax agencies work to develop safeguards to avoid identity theft related to tax returns. In 2017, they will be particularly concerned about the implications of taxpayers who file using tax software.

The IRS has alerted taxpayers that they might need to have their 2015 adjusted gross income handy if they are changing software products this year. This number might be required to submit your return electronically.

Getting your 2015 adjusted gross income might be difficult if you are a member of a divorced couple that is not on positive terms, or that hasn’t even been in contact the past few years.

However, you still have options. You might be able to get the information if you go to the IRS website and use the Get Transcript service.

 

 

Written By: Valerie Rind
Source: GOBankingRates

Should You Borrow from Your 401(k)?

The average credit card balance in June 2015 was $15,706, down from its peak of $18,600 in 2009.¹ With the average credit card annual percentage rate sitting at 14.9%, it represents an expensive way to fund spending.²

Which leads many individuals to ask, “Does it make sense to borrow from my 401(k) to pay off debt or to make a major purchase?”³

Borrowing from Your 401(k)

  • No Credit Check—If you have trouble getting credit, borrowing from a 401(k) requires no credit check; so as long as your 401(k) permits loans, you should be able to borrow.
  • More Convenient—Borrowing from your 401(k) usually requires less paperwork and is quicker than the alternative.
  • Competitive Interest Rates—While the rate you pay depends upon the terms your 401(k) sets out, the rate is typically lower than the rate you will pay on personal loans or through a credit card. Plus, the interest you pay will be to yourself rather than to a finance company.

Disadvantages of 401(k) Loans

  • Opportunity Cost—The money you borrow will not benefit from the potentially higher returns of your 401(k) investments. Additionally, many people who take loans also stop contributing. This means the further loss of potential earnings and any matching contributions.
  • Risk of Job Loss—A 401(k) loan not paid is deemed a distribution, subject to income taxes and a 10% penalty tax if you are under age 59½. Should you switch jobs or get laid off, your 401(k) loan becomes immediately due. If you do not have the cash to pay the balance, it will have tax consequences.
  • Red Flag Alert—Borrowing from retirement savings to fund current expenditures could be a red flag. It may be a sign of overspending. You may save money by paying off your high-interest credit-card balances, but if these balances get run up again, you will have done yourself more harm.

Most financial experts caution against borrowing from your 401(k), but they also concede that a loan may be a more appropriate alternative to an outright distribution, if the funds are absolutely needed.

 

 

 

 

  1. NerdWallet, June 25, 2015. Average for U.S. Households
  2. CreditCards.com, April 2015
  3. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

Here’s a Milestone You Don’t Reach Until Your Seventies

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Provided by LifeHack

The major milestones of older Americans are not attended with the same sense of wonder that accompanies the major milestones of younger Americans. Sure, registering for Social Security benefits and signing up for Medicare are rites of passage, but they don’t hold a candle to earning your driver’s license, receiving your first kiss, winning your first promotion, or dancing at your wedding.

If you have retirement accounts when you become a septuagenarian, then you’ll encounter a milestone the Internal Revenue Service (IRS) strongly encourages you to remember. Beginning April 1 of the year following the year in which you reach age 70½, you must begin taking required minimum distributions (RMDs) from most of your retirement accounts. Forbes offered this list:

  • Traditional IRAs
  • Rollover IRAs
  • Inherited IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k), 403(b), and 457(b) plan accounts
  • Keogh plans

There currently are no RMDs for Roth IRAs, unless the accounts were inherited.

If you have more than one qualifying retirement account, then a separate RMD must be calculated for each account. If you want to withdraw a portion of each account, you can, but it may prove simpler to take the entire amount due from a single account. Once you start, you must take RMDs by December 31 every year. If you don’t, you’ll owe some hefty penalty taxes.

The IRS offers some instructions for calculating the RMD due. “The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’ “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.”

If you would prefer to have some help figuring out the correct amount when RMDs are due, contact your financial professional.

My 401(k) is Tanking. What Do I Do?

Fidelity
Provided by Fidelity

The markets have taken some pretty wild swings lately. But is now the right time to revisit your 401(k) investments? I’ll tell you in this week’s Money Minute:

There’s nothing wrong wanting to check things out. If you’re nervous about your investments, ask your plan administrator to take a look under the hood. Jeanne Thompson, VP of investments for Fidelity, says 401(k) investors should work with a financial advisor at least once a year to rebalance their holdings anyway. “There are advantages to making changes both when the market is high or low,” Thompson says. “A lot of times people pick the beginning of the year to call [and rebalance] but there isn’t one particular time of year that’s best.”  The point of rebalancing is to make sure you’re taking on the right amount of risk given your age and retirement goals. Just don’t forget about your emotional tolerance as well. If you’re waking up in a cold sweat in the middle of the night every time the markets get shaky, maybe it’s not wise to put 90% of your 401(k) in stock funds.“You want to be able to sleep at night,” says Thompson.

Younger workers probably have less to worry about. If you’re decades away from retirement, don’t be surprised if your advisor tells you to hang tight. Younger workers are advised to take on more risk early because they have a longer time to recover from any market setbacks—and more time to reap the rewards when markets bounce back. Given the way most young workers are investing these days, they may have even less to worry about. According to Fidelity, nearly two-thirds of millennial 401(k) investors are 100% invested in target-date funds, a type of fund that picks your holdings based on your age. Target-date funds are meant to be left alone. They automatically shift away from stock-heavy investments to the safety of bonds as you age.

Just remember — you’re probably better in the market than out of it. Sometimes the best time to get in the market is when things are looking bleak — read: cheap. Just ask the folks who pulled their money out of the market back in 2008. Fidelity, one of the largest investment firms in the U.S., found that people who stayed in the market saw their accounts grow by 88% five years after the recession. People who turned to cash saw their balances grow by just 15%.

What’s important is that—even when you’re watching the value of your holdings fluctuate—you keep contributing to your account. Retirement plans are meant to be long-term investment vehicles, and making moves based on short-term volatility has proven a bad idea many times over.

The bottom line: You can’t time the market. What you can do is work with a financial advisor to come up with a retirement plan you don’t have to worry about every time the market gets shaky.

Written by Mandi Woodruff of Yahoo! Finance

(Source: Yahoo! Finance)

It’s Not Always a Good Idea to Rollover Company Stock

Geralt/Pixabay
Geralt/Pixabay

It’s not always a good idea to rollover company stock from a 401(k) plan to an IRA. In fact, doing so might mean you pay more in taxes to Uncle Sam than necessary.

If company stock held in an employer-sponsored 401(k) plan has appreciated, the difference between the amount paid for shares (the cost basis) and the current value of those shares is known as net unrealized appreciation (NUA). For instance, if an investor paid $10 a share for 1000 shares ($10,000) for stock that is now worth $15 a share, then the investment is worth $15,000, and the NUA is $5,000.

If the shareholder completes a rollover from a 401(k) plan to an IRA, those shares of company stock will be liquidated, along with the other assets in the account, and moved to an IRA where the assets will have an opportunity to continue growing tax-deferred. When the assets are distributed from the IRA, they may be taxed as ordinary income. If the investor is in the 28 percent tax bracket, the taxes owed would be about $4,200.

There is an alternative that could be a better choice tax-wise. An investor can request company stock be distributed in-kind and sent to a taxable account. The stock is not liquidated. The shares are moved to the new account. The investor may owe ordinary income taxes (and penalties if he or she is not yet age 59½) on the cost basis ($10,000). However, the net unrealized appreciation ($5,000) will not be taxed until the shares are sold. Taxes on the cost basis would be about $2,800.

If the investor takes a distribution right away, and the shares have been held for more than one year, the proceeds may be taxed at the long-term capital gains tax rate, which is currently lower than the ordinary income tax rate. If the investor is in the 15 percent capital gains tax bracket, another $750 would be owed in taxes. In this example, the investor could save about $650 in taxes overall.

Please keep in mind this is a hypothetical example and is not representative of any specific situation. Each investor is unique and your results may vary. Executing an NUA strategy seems pretty straightforward, but it can be tricky and not everyone is eligible. If you would like to learn more, please give your tax professional a call.

Should You Pay Off that Mortgage Before Retiring?

© Provided by CNBC

Conventional wisdom holds that retirees should not enter their golden years still holding a mortgage. However, Diahann Lassus, the president and chief investment officer of wealth-management firm Lassus Wherley, says, “That’s not a one-size-fits-all answer today, because there are many other factors you have to think about.”

Thanks to today’s low interest rates and reasonable long-term returns from investments, it may make more sense for retirees to carry a mortgage for a longer than usual period, she noted. Trouble is, many people are “obsessed” with paying their mortgage off. Either way, there are two parts to any such decision: the math and the emotion.

If you’re considering paying off a mortgage “because it’s really bothering you that it’s hanging over your head, you really want to start thinking about a longer time frame than tomorrow,” said Lassus. She recommends thinking 10 or even 15 years out but still making extra payments each year. However, don’t take money out of 401(k) plans and the like to help pay down your mortgage, she cautioned, “because it will benefit you more for the long term to build those retirement accounts.”

Conversely, carrying a mortgage into retirement offers a lot of financial positives — especially if you have a very low interest rate. “What you can do is invest those dollars [and] your earnings could be significantly higher, which means you’re using someone else’s money to earn more so that you’re able to build your retirement assets over time,” said Lassus. “And that tax deduction makes it even more cost-effective.”

In the end, act only after you’ve looked at the math in terms of investment returns vs. mortgage costs, she said. “But you also have to be able to sleep at night.”

Written by Kenneth Kiesnoski of CNBC

(Source: CNBC)

Are You Making This Money Move That’s Ruining Relationships?

© (Getty Images)
© (Getty Images)

Financial guru Dave Ramsey has been warning for years that borrowing money from family members makes Thanksgiving dinner taste different, and now a study is backing him up.

According to the PayPal Money Habits Study released this month, 35 percent of U.S. adults under age 55 say an unpaid IOU has damaged at least one of their relationships. It doesn’t take much money to cause a rift either. Among the 1,041 people surveyed, it was an average $450 unpaid debt that ruined a friendship or family bond .

“I’m not really surprised,” says Neil Krishnaswamy, a certified financial planner with Exencial Wealth Advisors in Plano, Texas. “[Unpaid IOUs] hurt the trust factor in a relationship.”

Owing money you can’t pay back puts you in a sticky situation, one that unfortunately has no easy fix.

Why Money Ruins Relationships

Ryan Howell, an associate professor of psychology at San Francisco State University, says money can cause stress even between those who are sure their relationship is strong enough to withstand an IOU. “A lot of people think we can control our emotions,” he says, “but when we’re in the position where we’re owed money, we become resentful or angry.”

On the flip side, lending money can also change the dynamic of a relationship. “Once you borrow funds from a family member or friend, they often feel entitled to give unsolicited advice,” says Gretchen Cliburn, senior managing advisor at BKD Wealth Advisors in Springfield, Missouri.

What’s more, that change could end up being permanent.

“Even if debts are paid back, maybe the relationship takes on a new dimension,” Krishnaswamy says. That means a friend or family member may no longer want to share details of their life that could reflect on their money management skills or financial situation.

Other Options to Consider

The best way to avoid broken friendships is to not borrow from family or friends in the first place. David Weliver, founder of financial website MoneyUnder30.com, suggests selling items at a pawn shop or going through an online loan service, such as LendingClub or Prosper, if you have a decent credit score.

However, he warns some sources of cash should be avoided. “I would never recommend a payday loan,” Weliver says, noting they can result in a cycle of taking out new loans to pay off old loans. “You get trapped.”

Cliburn says people in dire straits may even be better off taking money from a retirement fund than someone they know. “Personally, I would prefer to borrow from a 401(k) than a friend,” she says, “but neither is a good solution.” While pulling money from a 401(k) can prevent a friendship from becoming collateral damage, raiding a retirement fund could be detrimental to your quality of life later. Plus, if you leave your job for any reason, 401(k) loans must be repaid immediately. Failure to do so means the money becomes taxable and is subject to a 10 percent tax penalty.

Basics of IOU Etiquette 

If you don’t have any other option than to borrow from someone you know, you can take steps to minimize the negative effects of an IOU. “If you’re a borrower: communicate, communicate, communicate,” Cliburn says. “If you’re a lender: document, document, document.”

Lenders should keep careful records of what they are owed, any interest charges and when payments are made. Borrowers should try to make timely payments and let the other party know as soon as possible if they expect to miss one. Howell notes some people might find online payment services like Paypal.me helpful since they automate the process and eliminate the awkward money conversations that can occur when cash is changing hands.

In addition, you can takes steps upfront to reassure a lender you aren’t taking advantage of his or her generosity. “From a borrower’s point of view, a great gesture you can make is to write up a promissory note,” Weliver says. “It’s basically a written IOU.” Putting the details in writing can signal to the lender you’re serious about paying the money back.

Still, if you’re on the lending side of the equation, recognize that anyone approaching you for money is at high-risk of not paying you back. “If you’re willing to lend, you have to expect to never get it back,” Weliver says.

It’s not that they don’t want to repay the debt, but the fact that they had to resort to borrowing cash from you means they may be in serious financial trouble or have poor money management skills. Cliburn’s rule of thumb is “don’t lend money you can’t afford to lose.”

Howell, who studies money and happiness, says people should keep their eyes focused on what is important: the friendship, not the money. “Don’t let an IOU damage a friendship,” he says. “Friendships are the most important part of happiness.”

Copyright 2015 U.S. News & World Report

Written by Maryalene LaPonsie of US News & World Report

(Source: US News & World Report)

Retirement Replaces Homeownership in the American Dream

© TheStreet
© TheStreet

Most people still believe they can achieve the American dream, even after slow employment growth following a harsh recession, but many now define it as having a comfortable retirement rather than owning a home.

About 96% of people responding to a Wells Fargo/Gallup poll conducted at the end of May cited a financially secure retirement as their version of the American dream. That’s an increase from 92% a year ago, and higher than the 93% of people who identified success as buying a home. The poll surveyed a mix of retired (28%) and non-retired (72%) adults with at least $10,000 in savings and investments. Forty-one percent of respondents reported an annual income of $90,000 or more.

The exact definition of the American dream has changed somewhat since the term was popularized in James Truslow Adams’ 1931 book The Epic of America. In it, he wrote: “The American Dream is that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.”

Since then, social and economic mobility have generally been associated with such markers as owning a home, attaining higher education, and living as well as — if not better than — one’s parents. Specifying a comfortable retirement as part of that goal wasn’t necessary in previous years as many retirees were almost guaranteed one via their employer’s pension plans. As 401(k)s became more the more popular employer-sponsored retirement plan following the Revenue Act of 1978, workers increasingly found themselves on the hook for ensuring that they had enough money to last them through old age.

“There has been a rapid, systemic shift in risk and responsibility from the government to the individual in managing retirement,” said Andrew Eschtruth, an associate director at Boston College’s Center for Retirement Research. “Most individuals don’t yet fully grasp this change.”

In fact, data from the center pinpoints when that shift occurred. In 1983, of workers surveyed who had access to an employer-sponsored retirement plan, 62% were relying solely on a pension plan, 12% were relying on a 401(k) plan, and 26% were relying on a mix of the two. Less than ten years later, in 1992, workers were almost split in how they received their retirement benefits, with 44% citing a pension, 40% using a 401(k), and 16% relying on a mix. Today, 72% of employees rely on a 401(k), and only 17% rely on a pension.

While an encouraging 84% of respondents to Wells Fargo’s poll said they believe they can achieve the American Dream, only 69% of non-retired respondents said they have a specific plan to reach their retirement goals. And, of the respondents with a plan, only half of them have it in writing.

Of course, a plan is only good if followed, but having one in writing suggests that risks and other contingencies have at least been considered. Those who do not have a written plan say they haven’t had the time to create one (35%) or they haven’t given it much thought (26%). Even so, written plans are hardly foolproof. Only 37% of those with a written financial plan are highly confident that it will ensure they reach their goals.

“While the number of people with written plans is slowly trending higher, it’s still less than half of investors. It is critical to have a financial plan in place that spans life’s major milestones in order to reach your financial goals,” said Mary Mack, President of Wells Fargo Advisors.

Despite the seeming optimism Wells Fargo survey participants reported about achieving the American Dream, there are reasons to be less sanguine. The 401(k) generation is just starting to retire and data from the Boston College center suggests that they may not have saved enough. Of workers aged 55-64 with 401(k) accounts, the combined balance is just over $100,000, which only offers about $400 a month, according to Eschtruth. For most people, $400 a month combined with social security may still not be enough to support them through retirement.

Workers need to save more to meet the demands of increasing life expectancy and rising healthcare costs before retiring, Eschtruth said. Unfortunately, workers who are near retirement age have had to do the last years of their retirement saving in a low interest-rate environment in which yields on traditionally safer investments lagged normal inflation rates. Workers have had to save more or invest in traditionally riskier assets to make up for the shortfall.

“The problem with retirement is twofold,” Eschtruth said in an interview. “People need more and they expect less.”

Written by Carleton English of The Street

(Source: The Street)

12 Ways to Get the Most Out of Social Security

© Monkey Business Images/shutterstock
© Monkey Business Images/shutterstock

Social Security payments are the primary source of income for many retirees. Nearly one-third of respondents to a 2013 survey by the Federal Reserve Board indicated that they had no retirement savings. Whether Social Security will be your sole means of support or a source of pocket change, it’s a good idea to strategize how to get the most out of your benefits — before you hit retirement age.

WORK FOR 35 YEARS OR MORE

Throughout your working years, the Federal Insurance Contributions Act (FICA, as it appears on your pay stub) taxes part of your wages that count as credit toward Social Security. The Social Security Administration determines your monthly benefits based on how much you earned during your 35 highest grossing years before you file a claim. The calculation also factors in your age and the number of years you worked. The result is known as the primary insurance amount, or PIA. Check the official online estimator to see how these numbers work out for you.

WAIT UNTIL FULL RETIREMENT AGE

In a recent survey by MassMutual Life Insurance Company, more than 70 percent of respondents incorrectly assumed the retirement age was 65. Full retirement age is 66 for people born between 1943 and 1954 and rises incrementally to 67 for those born in 1960 and after. Although you can start collecting Social Security benefits when you turn 62, the amount of your monthly payment is reduced permanently by 25 percent.

DELAY UNTIL AGE 70

The maximum payout at full retirement age is $2,663 a month in 2015. But most financial planning experts recommend waiting even longer to start receiving benefits. For each year you hold off beyond 66 or 67 up to the maximum age of 70, the size of your monthly payment increases 8 percent. Once the benefit stream starts flowing, regardless of your age, there is no turning back; you cannot change your mind.

MAXIMIZE LIFETIME BENEFITS

The first Social Security payout is the base line for what you will receive every month thereafter. Each October, the Social Security Administration calculates a cost of living adjustment, based on changes in the federal consumer price index, and increases your monthly benefit accordingly for the following year. In 2015, the adjustment amounted to 1.7 percent. When you delay Social Security payments beyond the minimum retirement age of 62, the cost of living adjustments you “missed” are factored into the benefit you ultimately receive.

CONSIDER YOUR LIFE EXPECTANCY

The decision to stop working is, of course, a very personal one. There are many factors to consider when assessing the right time to push “go” on Social Security, including the question with an unknowable answer: How long will you live? Although waiting longer to collect benefits increases the monthly payout, it may not make sense for you. If your health is poor, it may be more prudent to start receiving Social Security now. And if you find yourself in financial straits once you hit retirement age, collecting a smaller benefit for a longer period might be the wiser (and necessary) choice.

BRIDGE THE GAP

It’s possible to retire at 62, delay collecting Social Security, and still maximize your financial situation. Depending on the size and nature of your retirement savings, you could draw on investments, particularly those made through a tax-deferred account such as a traditional IRA or 401(k), until Social Security checks start flowing. Research by a consulting firm that partners with Kiplinger suggests that waiting on Social Security could be more beneficial than limiting withdrawals from a private retirement account. That is, you would wind up with a larger Social Security benefit and likely extend the longevity of your retirement account. This is a very complicated calculation that depends in part on the type of investments you have and is best discussed with a financial planning professional.

LIMIT POST-RETIREMENT EARNINGS

You can keep your job after hitting age 62 and still collect Social Security, but there is a penalty for doing so. Until you reach full retirement age, the Social Security Administration (SSA) will deduct $1 from your benefit for every $2 you earn above $15,720. If you are working the year you reach full retirement age (66 or 67), SSA will deduct $1 for every $3 earned above $41,880 before your birth month. These deductions are temporary; when you stop working, the SSA will recalculate your benefit based on earnings and the benefits withheld. If you work beyond full retirement age, you can collect the full benefit regardless how much you earn.

CLAIM SPOUSAL BENEFITS FIRST

Being married has its advantages as far as Social Security is concerned. When one spouse files for benefits, the other may collect up to half that amount, assuming both spouses are at least 62. This is a boon to couples where one spouse didn’t earn any credits toward Social Security or earned significantly less than the other. For example, if a husband and wife retire at 66 with full retirement benefits — she at $1,500 a month and he at $600 a month — he can file for spousal benefits worth $750 instead of his own Social Security. Meanwhile, the value of his benefits continue to increase until age 70; at that point, he will receive the greater of the two. Note that spousal benefits are reduced for people younger than full retirement age.

‘FILE AND SUSPEND’

This tactic for maximizing spousal benefits pays off most when one half of the couple has reached full retirement age with accrued earnings that exceed those of the other spouse. The high-income earner can file for Social Security and immediately suspend the benefits flow. The lower-earning spouse, who must be at least 62, can then file for spousal benefits while the value of the higher earner’s benefits continue to grow until he or she reinstates the claim (ideally at age 70).

APPLY FOR SURVIVORS BENEFITS

A surviving spouse at least 60 years old can collect a percentage of a deceased spouse’s benefit. By waiting until full retirement age, the surviving spouse would receive a higher benefit — up to 100 percent of the deceased’s benefit, depending how old the deceased was when Social Security payments started. Survivor benefits are available even if the deceased was not yet receiving checks from the Social Security Administration. If both spouses are retired and collecting Social Security, the higher benefit is the one that endures regardless which half of the couple lives longest.

MINIMIZE YOUR TAX BURDEN

Once Social Security benefits kick in, recipients with income over certain thresholds must pay the tax man. (Income here includes variables such as wages, capital gains, dividends and interest payments, payouts from retirement accounts, and one-half of Social Security benefits.) A married couple with income between $32,000 and $44,000 owes taxes on up to half the value of their Social Security benefits. Income exceeding $44,000 incurs taxes up to 85 percent of the annual benefit. For single recipients, the outside income thresholds are $25,000 and $34,000.

START PLANNING NOW

Consider working with a financial planner who knows the ins and outs of the system to customize a plan for you. Barring that, free online tools from the likes of AARP and T. Rowe Price, an investment management firm, can help you optimize your Social Security benefits.
Written by Elizabeth Sheer of Cheapism
(Source: Cheapism)