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Retirement Moves To Make This Year

Retirement Moves To Make This Year

By Janet Kidd Stewart, Chicago Tribune (TNS)

Face it: You probably could have done more in 2015 to help your retirement picture, and you weren’t alone. A Capital One Bank survey released in December found that only a third of respondents accomplished their financial goals last year.

But whether you’re retired or just starting to save, there’s always this year. In 2016, you can double down on IRA contributions, lock in a tax-free charitable donation and make some big dents in your spending, among other moves.

“Making IRA contributions is one of the few provisions left in the tax code that you can do early in the new year to affect last year’s taxes,” said Ed Slott, an accountant who produces IRA training workshops for financial advisers and consumers.

While you’re at it, he said, consider tossing a contribution for 2016 into a traditional or Roth IRA, whichever makes the most sense given your age and tax situation.

“If you can go one step further, do a contribution for 2016 early in the year. You can wait until April of 2017, but then you’re back in the same rut,” he said. “If you can double up in one year, then you’re always ahead and that tax-deferred money builds up over the years.”

If you’re past age 70 this year, taking your required traditional IRA or 401(k) distribution early could also make sense, he said. It means you’ll avoid the year-end rush some financial institutions experience as people scramble to take their distributions, which can lead to administrative errors, he said.

And if you donate to charitable organizations, Congress has made permanent the ability to give to charities through your IRA, have it count toward your required distribution, and not have it affect your adjusted gross income. Now you can make a gift early in the year and bank the tax advantage, Slott said. Previously, when the provision was extended very late in the year, IRA holders typically had already taken their distributions, so for many the provision didn’t do much good, he said.

Another bit of permitted retirement-account hindsight involves undoing conversions of traditional IRA money to Roth IRAs. If you converted some funds in 2015, but the market goes south and you’d rather not pay income taxes on the original value, you have until October to recharacterize the conversion, Slott said.

“It’s one of the great second chances in the tax code,” he said. “It’s like being able to bet on a horse after the race is over.”

Another tax move for 2016 is to plan on delaying taking Social Security benefits until age 70, Slott said, particularly now that the ability to suspend one benefit while collecting the associated spousal benefit and the ability to choose between spousal and worker benefits at full retirement age is being phased out. The tax bonus, he said, comes because as you withdraw more retirement savings in your 60s while waiting to start benefits, you are spending down your retirement savings, which could mean lower taxable distributions in the future, he said.

If you took benefits early, consider suspending them at full retirement age, said Jane Bryant Quinn, author of “How to Make Your Money Last: The Indispensable Retirement Guide.” You earn delayed retirement credits through age 70.

Knocking out some major expenses, like a too-large home, is a much better move for retirement than nickel-and-diming yourself, she said. “The big things are where the money is. Once you’ve right-sized the big expenses, you won’t need to worry about drinking cheaper coffee,” she said.

Quinn also advocates a combination of immediate, fixed annuities within a fixed income strategy and a rising amount of stock index funds as retirees age (up to a ceiling that suits your risk tolerance), reflecting some new research showing that increasing the amount of equities helps retirees stay ahead of inflation.

“I’m getting more aggressive myself, increasing my exposure to equities over the past few years, and I haven’t regretted it, even though of course the market at some point will go down,” Quinn said.

ABOUT THE WRITER
Janet Kidd Stewart writes The Journey for the Chicago Tribune. Share your journey to or through retirement or pose a question at journey@janetkiddstewart.com.

(c)2016 Chicago Tribune. Distributed by Tribune Content Agency, LLC.

Earl Gilbert, 97, plays chess at Royal Oaks retirement community in Sun City, Arizona, January 8, 2013. REUTERS/Lucy Nicholson

Paying Down Credit Cards: Go With A Snowball Or Avalanche?

Paying Down Credit Cards: Go With A Snowball Or Avalanche?

By Carolyn Bigda, Chicago Tribune (TNS)

During the holidays it’s easy to add a few inches to your waistline — and to the balance on your credit card.

According to estimates by CardHub.com, which keeps track of credit card trends, total outstanding credit card debt was likely to exceed $900 billion by the end of 2015, up from $872 billion the year before.

Piling on new debt now could be costly, though, if the Federal Reserve continues to increase interest rates this year (which pushes up the rates on credit cards).

So to help you get back into the black, consider these strategies:

Look for zero-percent offers: Many credit card issuers offer a temporary zero-percent rate on balances that you transfer when you sign up for a new card.

You can search for such offers online, but one of the best deals available now is the Chase Slate card, which has 15 months of zero-percent interest on balance transfers and no fees for transfers made within 60 days of opening the card, said Kali Geldis, editorial director at Credit.com, an online resource about credit.

To qualify for the card, you need a strong credit rating, which generally means a score of 700 to 850.

If you’re young and just building a credit history _ and therefore don’t have a mighty score yet — you may have to shop around for other deals.

Geldis said one card to consider is Capital One QuicksilverOne, which has a zero-percent rate through September on balance transfers. The catch: The card carries an annual $39 fee.

“But if you make the most of those nine months of zero interest, it can be worth it,” Geldis said, noting that any additional purchases on the card earn 1.5 percent cash back.

Request a lower interest rate: If you don’t want to switch credit cards, another option is to ask your current issuer for a lower interest rate.

“People with the best credit are always the most likely to get breaks from the banks,” said Matt Schulz, senior industry analyst at CreditCards.com, which lists credit card offers. But, he said, the credit card marketplace is very competitive, so you may have some negotiating power.

“If you’re a 20-something with relatively low balances and a good history of paying on time, it’s definitely worth making that phone call,” he said.

Go with a snowball or avalanche: Once you’ve secured the lowest interest rate for your outstanding balance, the next step is to figure out a strategy for paying off the debt.

If you have multiple cards, you can pick between two options.

With one, the “snowball” approach, you pay off cards with smallest balances first (while still making minimum payments on your other cards). In doing so, you may feel a sense of accomplishment and get the motivation you need to keep paying off your debt.

With the second approach, the “avalanche,” you tackle the cards with the highest interest rate first (again, while making minimum payments on other cards), helping you pay less interest over the long run.

Both methods work well, although if you want to pay off your debt as quickly and inexpensively as possible, you should choose for the avalanche.

And it’s always a good idea to pay more than the minimum on your cards, said Bonnie Sewell, a financial planner in Leesburg, Va. To do so, she suggested picking up temporary work, such as house sitting, dog walking or signing up for odd jobs on Upwork.com.

What about cash you might have received for the holidays?

“My strongest suggestion would be to bank it, so that you slow down your credit card purchases,” Sewell said.

ABOUT THE WRITER
Carolyn Bigda writes Getting Started for the Chicago Tribune. yourmoney@tribune.com.

(c)2016 Chicago Tribune. Distributed by Tribune Content Agency, LLC.

Photo: Computer chips are seen on newly-issued credit cards in this photo illustration taken in Encinitas, California September 28, 2015. REUTERS/Mike Blake

3 Ways To Plan Ahead For Tax Season Now

3 Ways To Plan Ahead For Tax Season Now

By Michael McDonald, GOBankingRates.com (TNS)

Taxes are an unpleasant fact of life for most people, but planning ahead can make the task a little easier. Addressing each of the following areas can also help you legally minimize your taxes, and leave more money in your pocket.

MINIMIZE TAXABLE INCOME

Taxes are based on the income an individual earns each year, but not all cash a person receives is treated the same way. “There are numerous tax laws that individuals need to take into account when trying to plan the best way to manage their tax liability,” said Bill Rivero, a partner at accounting firm Correia, Rivero and LeFebvre. “An accountant or tax professional can help with this problem.”

One way you can minimize your tax liability is to shift as much income into long-term capital gains as possible. Investment assets held for more than 365 days are generally taxed at a much lower rate than ordinary income or short-term capital gains (those held for less than 365 days). This reality can influence investment choices for many individuals.

Individuals whose income varies from year to year might want to consider shifting some of that income to the next calendar year, to more evenly distribute their income over time. This can help you to avoid paying very high tax rates one year, and then very low tax rates the next year. For instance, salespeople, those working on commission or expecting a bonus can ask their employers to defer a December payment until January. In some cases, waiting a couple extra weeks for a check can mean thousands of dollars in tax savings.

MAXIMIZE 401(k) CONTRIBUTIONS

A 401(k) plan ranks as one of the best ways to manage one’s tax liability, but it requires some advance planning. An individual can contribute up to $18,000 of pretax income to a qualified 401(k) plan each year, and when it’s matched by an employer, the individual gets an automatic 100 percent return on their investment. The catch with 401(k) plans is that since the money is intended for retirement, it can’t be withdrawn until the individual is 59 1/2 years old. Any funds withdrawn before that time face hefty fines and taxes from the IRS.

However, not everyone has access to a 401(k) plan, and some people who do might not take full advantage of it because they want to save more than $18,000 annually. For those facing that dilemma, maximizing deductions is critical. Some of the most important and common tax deductions include those for mortgage interest, student loan interest, charitable contributions, union dues and foreign taxes. Smart planning can help you identify and take advantage of all the deductions for which you’re eligible.

MAXIMIZE TAX CREDITS

Although tax deductions lower one’s taxable income, they do not lower taxes as much as tax credits do. A $100 deduction for a person at the 25 percent rate will lower tax liability by $25. In contrast, a $100 tax credit lowers tax liability by $100. Tax credits vary from year to year, and small business owners can take advantage of several credits not available to most individuals. Still, there are tax credits even the average employee can take advantage of with proper planning.

Common tax credits include the earned income tax credit, the American opportunity tax credit and the child tax credit. Under the child tax credit, individuals are given up to a $1,000 credit for each qualifying child under the age of 17. This credit only applies to individuals with incomes under $110,000 for married couples, and under $75,000 for those filing individually. The earned income tax credit applies to those with low incomes.

Finally, the American opportunity credit is available to people who have college education expenses, and whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing jointly. The credit can be worth up to $2,500, but the value drops as an individual’s income increases.

GOBankingRates.com is a leading portal for personal finance news and features, offering visitors the latest information on everything from interest rates to strategies on saving money, managing a budget and getting out of debt.

© 2015 GOBankingRates.com, a ConsumerTrack web property. Distributed by Tribune Content Agency, LLC.

Photo: 401(K) 2012 via Flickr

 

Tax-Free Gift Limits: How Much Money Can You Give?

Tax-Free Gift Limits: How Much Money Can You Give?

Dear Carrie: My mother is feeling especially generous this holiday season, and has mentioned that she intends to give each of her children and grandchildren a significant monetary gift. I’m wondering, though, what that means tax wise for her — and for all of us? — A Reader

Dear Reader: How wonderful for you and your children that your mother is in a position to help you all financially. I’m a big believer in one generation helping the next, and the holidays are an excellent time to share one’s good fortune. I’m also happy that you’re concerned about the tax situation for your mother, as well as yourself. It shows a mutual concern and a sense of financial responsibility. Gifts are great to give, but it’s even more gratifying when the receiver is aware and appreciative.

In this situation, I’m pleased to tell you that chances are there will be no tax liability for either your mother or any of the recipients. That’s because current gift tax laws allow for some pretty hefty exclusions for the giver, and gifts aren’t considered as income to the receiver, regardless of the size.

But, of course, as with anything to do with taxes, there are some very particular dollar figures that you should be aware of. So here are the basics that perhaps you and your mother can review together.

What You Can Give Tax-Free Annually

While technically the IRS considers any gift a taxable gift, currently an individual can gift up to $14,000 a year to anyone — and any number of people — without incurring gift taxes, or even having to report the gift. Married couples splitting gifts can give up to $28,000 a year (splitting gifts requires you to file a gift tax return where you make the election to do so — see below).

This means your mother could give each of her children and grandchildren up to $14,000 during this 2015 holiday season, and not only would she not have to file a gift tax return, none of you would have to pay taxes or even report the gift.

Just for the record, if your mother should choose to make direct payments to providers for tuition or medical expenses for any of you, those payments wouldn’t be considered taxable gifts, and aren’t included in the $14,000 annual limit. By doing that, she could give even more without tax consequences.

How the Lifetime Exclusion Works

If you stay within the $14,000 annual exclusion, giving monetary gifts can be pretty simple. It’s when you give more than $14,000 to any one person during the course of a year that things get a bit more complicated.

You may have heard of the lifetime exclusion. This is the amount you can give above and beyond the $14,000 annual limit during the course of your life without incurring gift taxes. For 2015 that amount is a whopping $5,430,000 and will go up to $5,450,000 in 2016.

With such a high limit, you’d be right to think that most people won’t need to be concerned. But, whether or not you ever reach the limit and have to pay gift taxes, you are required to report any gift that’s more than the $14,000 annual limit. The excess counts toward your lifetime exclusion, and will be used to calculate whether your estate will owe taxes upon your death.

Here’s an example:

Let’s say your mother has two children and four grandchildren. As an individual, she can give each of these six people up to $14,000 this year without having to report the gifts or pay gift taxes.

However, let’s say that she wants to give each family member $25,000 this year. In this case, anything above $14,000 given to any one individual has to be reported, and counts toward the $5,430,000 exclusion. So she’d have to report that extra $11,000 per person and would subtract $66,000 from her lifetime exclusion (the cumulative total is always reported on the most recent gift tax return).

A couple More Important Points:

Another thing anyone contemplating giving large gifts should be aware of is that to qualify for the exclusions — both annual and lifetime — a gift must be a present interest, which means that the recipient has an unrestricted right to the immediate use of the property. A gift of future interest, which is restricted in some way by a future date, doesn’t qualify (there are some exceptions, including custodial accounts and so-called “Crummey trusts”). Gifts of cash and property where title passes immediately are examples of gifts of present interest.

I also want to expand a bit on gift splitting. As I mentioned, a couple can combine their annual limit and give twice as much (currently $28,000) to any number of individuals each year provided both are in agreement. However, if they decide to do this for one gift, they must split all other gifts during that year. And they would also have to file a gift tax return (IRS Form 709).

Making the Most of the Gift

Your mother’s generosity can provide opportunity for all of you on many levels. This would be a perfect time to sit down together as a family and talk about saving, investing and how to make your mother’s gift grow. Even young children can learn about setting goals, budgeting and how to prioritize spending. A custodial account is a great way to teach young people about investing. And discussing these things might give the adults a fresh perspective on their own finances.

To me, while you’re all lucky to receive this holiday windfall, the chance to focus as a family on wise money management could be the greatest gift of all.

Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty,” available in bookstores nationwide. Read more at http://schwab.com/book. You can email Carrie at askcarrie@schwab.com. This column is no substitute for individualized tax, legal or investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax adviser, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com. COPYRIGHT 2015 CHARLES SCHWAB & CO. INC., MEMBER SIPC DISTRIBUTED BY CREATORS.COM

Photo: Philip Taylor via Flickr