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Apache is functioning normally

June 8, 2023 by Brett Tams

The dividend payout ratio is the ratio of total dividends paid to shareholders relative to the net income of the company. Investors can use the dividend payout formula to gauge what fraction of a company’s net income they could receive in the form of dividends.

While a company will want to retain some earnings to reinvest or pay down debt, the extra profit may be paid out to investors as dividends. As such, investors will want a way to calculate what they can expect if they’re a shareholder.

Understanding Dividends and How They Work

Before calculating potential dividends, investors will want to familiarize themselves with what dividends are, exactly.

A dividend is when a company periodically gives its shareholders a payment in cash, or additional shares of stock, or property. The size of that dividend payment depends on the company’s dividend yield and how many shares you own.

Many investors look to buy stock in companies that pay them as a way to generate regular income in addition to stock price appreciation. A dividend investing strategy is one way many investors look to make money from stocks and build wealth.

Investors can take their dividend payments in cash or reinvest them into their stock holdings. Not all companies pay dividends, and those that do tend to be large, established companies with predictable profits — blue chip stocks, for example. If an investor owns a stock or fund that pays dividends, they can expect a regular payment from that company — typically, each quarter. Some companies may pay dividends more frequently.

Pros and Cons of Investing in Dividend Stocks

Since dividend income can help augment investing returns, investing in dividend stocks — or, stocks that tend to pay higher than average dividends — is popular among some investors. But engaging in a strategy of purchasing dividend stocks has its pros and cons.

As for the advantages, the most obvious is that investors will receive dividend payments and see bigger potential returns from their holdings. Those dividends, in addition to stock appreciation, allow for two potential ways to generate returns. Another benefit is that investors can set up their dividends to automatically reinvest, meaning that they’re holdings grow with no extra effort.

Potential drawbacks, however, are that dividend stocks may generate a higher tax burden, depending on the specific stocks. You’ll need to look more closely at whether your dividends are “ordinary” or “qualified,” and dig a little deeper into qualified dividend tax rates to get a better idea of what you might end up owing.

Also, stocks that pay higher dividends often don’t see as much appreciation as some other growth stocks — but investors do reap the benefit of a steady, if small, payout.

What Is the Dividend Payout Ratio?

The dividend payout ratio expresses the percentage of income that a company pays to shareholders. Ratios vary widely by company. Some may pay out all of their net income, while others may hang on to a portion to reinvest in the company or pay off debt.

Generally speaking, a healthy range for payout ratios is from 35% to 55%. There are certain circumstances in which a lower ratio might make sense for a company. For example, a relatively young company that plans to expand might reinvest a larger portion of its profits into growth.

How to Calculate a Dividend Payout

Calculating your potential dividend payout is fairly simple: It requires that you know the dividend payout ratio formula, and simply plug in some numbers.

Dividend Payout Ratio Formula

The simplest dividend payout ratio formula divides the total annual dividends by net income, or earnings, from the same period. The equation looks like this:

Dividend payout ratio = Dividends paid / Net income

Again, figuring out the payout ratio is only a matter of doing some plug-and-play with the appropriate figures.

Dividend Payout Ratio Calculation Example

Here’s an example of how to calculate dividend payout using the dividend payout ratio.

If a company reported net income of $120 million and paid out a total of $50 million in dividends, the dividend payout ratio would be $50 million/$120 million, or about 42%. That means that the company retained about 58% of its profits.

Or, to plug those numbers into the formula, it would look like this:

~42% = 50,000,000 / 120,000,000

An alternative dividend payout ratio calculation uses dividends per share and earnings per share as variables:

Dividend payout ratio = Dividends per share / Earnings per share

A third formula uses retention ratio, which tells us how much of a company’s profits are being retained for reinvestment, rather than paid out in dividends.

Dividend payout ratio = 1 – Retention ratio

You can determine the retention ratio with the following formula:

Retention ratio = (Net income – Dividends paid) / Net income

You can find figures including total dividends paid and a company’s net income in a company’s financial statements, such as its earnings report or annual report.

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Why Does the Dividend Payout Ratio Matter?

Dividend stocks often play an important part in individuals’ investment strategies. As noted, dividends are one of the primary ways stock holdings earn money — investors also earn money on stocks by selling holdings that have appreciated in value.

Investors may choose to automatically reinvest the dividends they do earn, increasing the size of their holdings, and therefore, potentially earning even more dividends over time. This can often be done through a dividend reinvestment plan.

But it’s important to be able to know what the ratio results are telling you so that you can make wise decisions related to your investments.

Interpreting Dividend Payout Ratio Results

Learning how to calculate dividend payout and use the payout ratio is one thing. But what does it all mean? What is it telling you?

On a basic level, the dividend payout ratio can help investors gain insight into the health of dividend stocks. For instance, a higher ratio indicates that a company is paying out more of its profits in dividends, and this may be a sign that it is established, or not necessarily looking to expand in the near future. It may also indicate that a company isn’t investing enough in its own growth.

Lower ratios may mean a company is retaining a higher percentage of its earnings to expand its operations or fund research and development, for example. These stocks may still be a good bet, since these activities may help drive up share price or lead to large dividends in the future.

Dividend Sustainability

Paying attention to trends in dividend payout ratios can help you determine a dividend’s sustainability — or, the likelihood a company will continue to pay dividends of a certain size in the future. For example, a steadily rising dividend payout ratio could indicate that a company is on a stable path, while a sudden jump to a higher payout ratio might be harder for a company to sustain.

That’s knowledge that may be put to use when trying to manage your portfolio.

It’s also worth noting that there can be dividend payout ratios that are more than 100%. That means the company is paying out more money in dividends than it is earning — something no company can do for very long. While they may ride out a bad year, they may also have to lower their dividends, or suspend them entirely, if this trend continues.

Dividend Payout Ratio vs Dividend Yield

The dividend yield is the ratio of a stock’s dividend per share to the stock’s current price:

Dividend yield = Annual dividend per share/Current stock price

As an example, if a stock costs $100 and pays an annual dividend of $7 the dividend yield will be $7/$100, or 7%.

Like the dividend payout ratio, dividend yield is a metric investors can use when comparing stocks to understand the health of a company. For example, high dividend yields might be a result of a quickly dropping share price, which may indicate that a stock is in trouble. Dividend yield can also help investors understand whether a stock is valued well and whether it will meet the investor’s income needs or fit with their overall investing strategy.

Dividend Payout Ratio vs Retention Ratio

As discussed, the retention ratio tells investors how much of a company’s profits are being retained to be reinvested, rather than used to pay investors dividends. The formula looks like this:

Retention ratio = (Net income – Dividends paid) / Net income

If we use the same numbers from our initial example, the formula would look like this:

~58% = (120,000,000 – 50,000,000) / 120,000,000

This can be used much in the same way that the dividend payout ratio can, as it calculates the other side of the equation — how much a company is retaining, rather than paying out. In other words, if you can find one, you can easily find the other.

The Takeaway

The dividend payout ratio is a calculation that tells investors how much a company pays out in dividends to investors. Since dividend stocks can be an important component of an investment strategy, this can be useful information to investors who are trying to fine-tune their strategies, especially since different types of dividends have different tax implications.

In addition, the dividend payout ratio can help investors evaluate stocks that pay dividends, often providing clues about company health and long-term sustainability. It’s different from other ratios, like the retention ratio or the dividend yield.

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FAQ

How do you calculate your dividend payment?

To calculate your exact dividend payment, you’d need to know how many shares you own, a company’s net income, and the number of total outstanding shares. From there, you can calculate dividend per share, and multiply it by the number of shares you own.

Are dividends taxed?

Yes, dividends are taxed, as the IRS considers them a form of income. There may be some slight differences in how they’re taxed, but even if you reinvest your dividend income back into a company, you’ll still generate a tax liability by receiving dividend income.

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Apache is functioning normally

June 8, 2023 by Brett Tams

Best for cash back: Maximum Rewards® World Mastercard® by Amalgamated Bank

Pros

No annual fee
Unlimited 1.5% cash back on all purchases
$30 bonus (30,000 points) when you spend $600 within the first three billing cycles
0% intro APR on purchases and balance transfers for the first 12 billing cycles

Cons

Higher variable APR on purchases and balance transfers after the introductory period
3% foreign transaction fee

Features

Travel insurance including

Amalgamated Bank supports a number of different causes from environmental sustainability to workers’ rights, and it’s union-owned to boot. Founded in 1923, it’s been rallying behind rallying people for over a century. It’s net-zero and run on renewable energy, pro-union, an ally to immigrants, and politically progressive.

But we’re here to talk about the credit card too. The Maximum Rewards® World Mastercard® is a rewards credit card that earns 1.5% rewards on all purchases. It’s got a great 12-month intro APR, a signup bonus, and good redemption flexibility — all without an annual fee.

Choose this option if you want to have your cake and eat it too (i.e. side with a bank that’s doing some good and still get a great flat-rate cash back card).

Learn more.

Best socially responsible card: Rewards Platinum Visa® from Green America

Pros

No annual fee
Unlimited one point per dollar on all purchases
0% intro APR on purchases and balance transfers for the first 12 billing cycles
$150,000 in Travel Accident Insurance

Cons

1% foreign transaction fee

Features

Donates a portion of profits to charities
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Maybe you’ve heard of Green America, the nonprofit working to combat climate change, promote ethical practices and corporate governance, fight for social justice, and more. Green America’s work covers a broad range of issues, and its credit card, the Rewards Platinum Visa®, supports these efforts with every transaction. And it earns unlimited points on everything.

This affinity card has a fairly competitive APR, doesn’t charge an annual fee, and has a few nice benefits like travel insurance and a lower foreign transaction fee. But it’s not perfect, and we wish it were more clear about how donations worked and where exactly they were going.

This is a good choice if you’re interested in socially responsible causes and giving back.

Learn more.

Best card for charitable donations: Charity Charge Card

Pros

No annual fee
Lower interest rate on purchases

Cons

Does not earn rewards
2% foreign transaction fee

Features

Donates 1% of all purchases to the charity of your choice

The Charity Charge Card automatically gives to charity every time you use it. Can your current card do that?

When you apply for this credit card, you get to choose the nonprofit you want your spending to automatically benefit. If a nonprofit is set up to receive credit card donations, it is likely available as an option. Bonus: your donations may qualify for charitable tax deductions, which can help the fact that you otherwise won’t earn rewards or cash back sting a little less.

Since donations are calculated as a percentage of spending, you’ll have a greater impact the more regularly you use this card. If you don’t want to miss out on rewards entirely, you could use this card for some of your spending that wouldn’t qualify for the best rates otherwise.

Learn more.

Read more: Want To Help But Can’t Give Cash? 10 Alternatives To Donating Money

Best secured credit card: Secured Mastercard® by Amalgamated Bank

Pros

Potential for a credit limit increase in as little as seven months after opening
Set your own credit line between $300 and $5,000
Potential to receive security deposit back in as little as 11 months with on-time payments

Cons

Does not earn rewards or cash back
$35 annual fee
3% foreign transaction fee

Features

Set your own limit and qualify for a credit limit increase

The Secured Mastercard® by Amalgamated Bank is a decent low-fee secured card for eco-conscious borrowers. It has a minimum limit of $300 and a maximum of $5,000, and your line is determined by your security deposit. This carries a modest annual fee (for a secured card) of $35 and fairly average interest rates, and it’s a little more flexible than the average competitor.

You may be eligible for a credit limit increase in as little as seven months after opening an account with responsible use and can get your deposit back in less than a year.

This is a good option for borrowers with little or poor credit, but you should only choose this if you couldn’t qualify for one of the others, as it doesn’t earn rewards and has higher fees.

Learn more.

Best for travel: Visa Signature Card (Climate Card) by Beneficial State Bank

Pros

No annual fee
Unlimited one point per dollar on all purchases

Cons

1% foreign transaction fee

Features

Travel insurance and protection including: Travel & emergency assistance services, travel accident insurance, auto rental collision damage waiver, and roadside dispatch

Beneficial State Bank is a purpose-driven financial institution with an eco-friendly card for people who may want their spending to help out green charities and nonprofits.

The Climate Card is similar to the Rewards Platinum Visa by Green America in that it earns flat-rate rewards that can be donated to charity. But unlike the Green America card, the Climate Card has you choose what happens to your points. So if you want to donate them, you can. But if you want to instead redeem for cash or travel, that’s your prerogative too.

This is a good travel card because it has a 1% foreign transaction fee (compared to 1% or 2%) and comes with benefits like insurance and roadside dispatch. And because it lets you choose between keeping your points and donating them, it’s also one of the most flexible choices.

Learn more.

Best fee-free credit card (for people in Washington): Verity Signature Rewards Visa

Pros

No annual fee
No foreign transaction fee
1.5 points per dollar on all purchases
0% intro APR on purchases and balance transfers for the first 12 billing cycles

Cons

Only people in Washington state are eligible to join Verity Credit Union

Features

Signature Rewards Visa protection benefits including: extended warranty protection, emergency assistance travel services, accident insurance, and more

Credit cards without foreign transaction fees can be hard to come by, but this card makes it happen. The Signature Rewards Visa by Verity Credit Union charges no annual fee and no foreign transaction fee, giving it a huge advantage over all the others on this list. But it has the huge disadvantage of being only available to people in the state of Washington.

Points can be redeemed for cash, travel, gift cards, or purchases and there are no restrictions for earning. There’s also an intro APR offer of 12 months on purchases and balance transfers, making this comparable to many rewards cards on the market. If you do qualify to join Verity, consider it for this — especially if you’re on the fence about eco-friendly cards.

This is a good card from an admirable credit union, but it won’t be a fit for everyone (or most).

Learn more.

Best debit card for earning: Aspiration Spend and Save

Pros

Up to 10% cash back on eligible Conscience Coalition purchases
Earns up to 3.00% interest with qualifying debit activity

Cons

Monthly fees for the Plus Plan ($7.99 a month paid monthly or $5.99 a month paid annually)
Does not earn cash back on all purchases
Does not build credit

Features

$10 minimum deposit
Additional green benefits like carbon offsetting and planting trees with purchases

The Aspiration Spend & Save account offers a debit card that earns rewards like a credit card and comes with a whole host of eco-friendly benefits. There are two plans to choose from.

The base Aspiration plan uses a “pay what is fair” fee structure and the Aspiration Plus plan costs $5.99 or $7.99 a month depending on if you pay monthly or annually. The Aspiration plan pays up to 1.00% interest and up to 3% – 5% cash back while the Aspiration Plus plan pays up to 3.00% interest and 10% cash back on Conscience Coalition spending.

Both have features like early direct deposit and the ability to plant trees when you spend, but only the Aspiration Plus account includes additional automatic offsets and Purchase Assurance. If you decide this account is right for you, pick the Plus Plan to maximize benefits.

Read our full Aspiration review.

Aspiration Zero Credit Card

Aspiration used to offer a credit card called the Aspiration Zero Credit Card, but they are no longer accepting new applications. Now, this bank’s only individual solution is the Spend & Save account, a rewards-earning checking account with a debit card.

Best debit card for eco-friendly spending: FutureCard Visa Debit Card

Pros

No monthly fees or annual fee
6% cash back on eligible purchases at FuturePartners
5% cash back on “climate-smart spending” purchases such as EV charging, bikes and scooters, public transit, etc.

Cons

Does not earn cash back on all purchases
Does not build credit

Features

See your climate impact using your FutureScore
Complete missions to earn FutureCoins

The FutureCard Visa Debit Card earns rewards based on your spending habits. The more eco-friendly your purchases, the more you’ll earn.

With this card, you’ll get points for “climate-smart spending.” This is defined as purchases with a lower carbon footprint, and examples include electric vehicle charging and secondhand items. There’s no cap on earnings but you won’t earn cash back on all purchases.

This card is also unique because it provides you with a summary of your impact in the form of a FutureScore. The app then gives you suggestions for living more sustainably and pays FutureCoins, which can be redeemed for cash, when you complete Missions. Look out for promotions and bonus days to earn even more cash back on your purchases.

Learn more.

Best business credit card for nonprofits: Charity Charge Nonprofit Business Card

Pros

No annual fee
Discounts and rebates on business spending

Cons

Does not earn rewards

Features

Mastercard Zero Liability protection

If you own or work for a nonprofit and are looking for a business credit card, look no further than the Charity Charge Nonprofit Business Card. This business card is exclusively for nonprofits and works with over 2,000 nonprofits to meet their spending and financing needs.

This card doesn’t charge an annual fee and offers service benefits specifically geared toward not-for-profit rather than for-profit institutions. These include expert guidance from the support team and dedicated representatives.

The Charity Charge Nonprofit Business Card is ideal for nonprofits with less credit to work with, especially newer and growing organizations.

Learn more.

What is an eco-friendly credit card?

An eco-friendly credit card or green credit card has a positive environmental impact.

There isn’t one single type of eco-friendly credit card, as the term “green” looks a little different to everyone, but the point is that they’re better for the planet. There are also green and eco-friendly debit cards.

A card might be green if it:

Has a smaller carbon footprint than the average card
Rewards you for eco-friendly spending
Donates to environmental nonprofits
Plants trees with each transaction

These are just a few examples.

There are also cards that have a more general positive impact. For example, they might support socially responsible missions such as fair labor and equal housing. These can benefit the planet but might also benefit other causes as well. The Rewards Platinum Visa® from Green America is a good example of this.

Pros and cons of greener cards

Green credit and debit cards aren’t for everyone, but for some might be just what they’ve been looking for. Here are a few of the main pros and cons to consider with this type of product.

Pros

Eco-friendly cards offer many benefits for people with environmental — or financial — goals.

Some allow you to donate to charities without using money out of your own pocket, and these donations could be tax deductible. The best ones even let you choose the charity.

Others incentivize you to be more eco-friendly in your spending habits by handing you the most rewards points for green purchases. This could help you live more sustainably.

And a few have their own unique benefits, like Aspiration’s tree-planting with transactions.

Many of these cards earn some sort of rewards for spending, with several offering flat rates on everything. And a handful also have everyday perks like purchase protection and discounts too.

Cons

While greener cards offer benefits like lowering your impact and motivating yourself to make more sustainable choices, they do require you to compromise in some areas.

When it comes to rewards you actually earn, most of these cards just aren’t as competitive as others. The highest rate we’ve seen for green credit cards is 1.5% cash back, and this is the lowest base rate for many of the best rewards cards out there. And you might not have a lot of flexibility in how you redeem these rewards with an eco-friendly card.

These cards also don’t have as much going for them in the perks department. They have leaner travel benefits, if any at all, and very few free features.

Sure, the satisfaction of knowing you’re helping the planet is rewarding, but it might not help you save money and isn’t as flashy as what other cards offer.

Who are eco-friendly credit cards and debit cards best for?

If your spending habits make sense for one of these cards and you’re willing to compromise on rewards some in order to do good with your dollars, an eco-friendly card could be right for you.

You might decide to go green with your card because you don’t want to support big banks with harmful practices that hurt the planet, people, or both. For example, many major card issuers are responsible for enormous carbon footprints and lend money to fossil fuel companies.

Some are also involved in scandals, wrapped up in politics, and sneaky about where they spend money. It’s not a good look.

If you want to be part of something different, these cards are just one way to do that.

Read more: What is public banking?

Who are eco-friendly credit cards and debit cards not ideal for?

Don’t go for a green credit card or socially responsible card if your number one priority is earning the most rewards. These cards have lower payouts than others, fewer options for redemption, and often less earning flexibility.

Eco-friendly credit and debit cards are not yet on par with the rest of the options in the personal finance world. And until they have higher rewards rates and more benefits overall, they’re not likely to become mainstream any time soon.

Fortunately for those who want to help the planet but don’t want to sign up for one of these cards, there are other ways to spend more sustainably. This next section is for you.

What if you don’t want a green credit card?

If you don’t want to have to compromise on rewards — or you just don’t need a new card — but still want to make a positive impact, you can skip the card and do these things:

Click the link below for more ways to make your money green.

Read more: 12 easy ways to make your money green and protect our planet

Summary

There are many green credit and debit cards to choose from, each with its own benefits for your wallet and the environment. We’ve highlighted the best here, but even some of these leave a little to be desired when it comes to rewards earning, perks, and redemption.

But if this category catches on as consumers grow more conscious of their impact on the planet, more eco-friendly cards will be available and this space will become more competitive.

Apache is functioning normally

June 8, 2023 by Brett Tams

If you have a savings account, how much interest does it earn? Probably not enough. And if you don’t have a savings account, why not?

A savings account isn’t meant to make you rich. It’s a safe, if not very sexy, way to plan for your future and protect your money. But things get more interesting when you choose a high-yield savings account instead of a traditional savings account. A traditional account will pay pennies on your balance, but a high-yield savings account can help you earn extra money you’ll actually notice.

But how do you choose a savings account when there are so many out there? We did the research for you. These are the top high-yield savings accounts with the best interest rates, features, and benefits.

What’s Ahead:

Best high-yield savings accounts

The Ally Online Savings Account is our top pick for the best high-yield savings account overall because it consistently offers a competitive interest rate and includes features to help you save. For beginners, the Discover Online Savings Account might be a better option thanks to its simple platform and above-average support. The CIT Savings Account is our second runner-up because it has the highest APY of the bunch but does come with a minimum deposit requirement.

We also considered the Axos Bank High-Yield Savings Account, High-Yield Chime® Savings Account, Capital One 360 Performance Savings Account, and Marcus Online Savings Account for our list. Even though these didn’t make our top three, they’re all good choices well worth checking out.

Best overall: Ally Online Savings Account

Pros

No fees
No minimums
Boosters to help you save faster

Cons

No branch locations

Features

Minimum balance: $0
Minimum deposit: $0
APY: 2.50%
Monthly fee: $0

The Ally Online Savings Account is the best high-yield savings account overall offering a generous interest rate and tons of free features to help you save. And speaking of free, this account really is. There are no monthly maintenance fees, overdraft fees, or transfer fees to deplete your earnings.

This high-yield savings account supports you to save by giving you the option to create buckets for different goals and use boosters to save faster. The boosters are:

Recurring Transfers – schedules automatic transfers from a linked account
Round Ups – rounds up your Ally debit card purchases to the nearest dollar and sends the extra to your savings
Surprise Savings – points out money in your checking account that isn’t being used for anything and moves it to your savings

This account is easy to open. There are no minimum balance requirements to earn interest and you can fund it with as little as $0.01. While Ally technically uses balance tiers (<$5,000, $5000 – $24,999.99, and >$25,000), all positive balances currently earn the same rate.

For help with any issues you might have, Ally offers 24/7 live customer support via chat or phone.

Learn more about the Ally Online Savings Account or read our full review.

Best for beginners: Discover Online Savings Account

Pros

No fees
No minimums
Instant transfers between Discover accounts

Cons

Very few branch locations
No advanced savings features like buckets or round-ups

Features

Minimum balance: $0
Minimum deposit: $0
APY: 4.00%
Monthly fee: $0

The Discover Online Savings Account gets pretty much everything right, from the competitive interest rate to the lack of account fees. We love this high-yield savings account for beginners because it’s easy to use and doesn’t have minimums.

There is no minimum deposit to open or minimum balance required to earn interest or avoid having your account shut down, making this the perfect option for you even if you only have a few bucks to put away right now. You can even open an account with nothing and come back later to fund it.

Although this is a pretty basic account with few bells and whistles, there’s no monthly maintenance fee to worry about and you’ll earn interest on any balance. Plus, the Discover mobile app is notoriously solid, and ditto for customer service.

Interest is compounded daily and credited monthly into your account. If you have a Discover checking account and debit card, you can easily transfer money between this and your savings account. You can also schedule automatic recurring transfers to put your saving on autopilot.

Discover does have some branch locations, but they’re really limited, so you might not have the option to manage your account in person. This account also lacks features to help organize and simplify your saving such as buckets and round-ups.

Learn more about the Discover Online Savings Account or read our full review.

Best for long-term saving: CIT Savings Connect Account

Pros

No fees
No minimum balance

Cons

Minimum deposit required
No branch locations

Features

Minimum balance: $0
Minimum deposit: $100
APY: 4.50%
Monthly fee: $0

For high-interest saving, the CIT Savings Connect Account is an excellent choice. This is a newer account with a really competitive APY of 4.50%. There are no minimum balance requirements to earn this rate and you only need to deposit $100 to open. Plus, there are no monthly fees. See details here.

CIT Bank also reimburses up to $30 in third-party ATM fees per statement period and supports free mobile check deposits and external transfers.

The CIT Savings Connect account currently pays the same interest rate on all balance tiers, so you don’t have to worry about maintaining a certain balance or making regular deposits to avoid fees and earn more (although automating your saving is never a bad idea).

This basic account would be a good fit for most people, especially those looking for a fee-free option with no balance requirements. It has one of the best rates and is one of the most straightforward to open and use, so it could make a great primary or secondary savings bucket. Choose the CIT Savings Connect account if getting the best interest rate is your top priority.

CIT Bank offers a number of other savings products including stand-out money market accounts and CDs, so keep this bank in mind if you have a few different savings goals and want to make sure you’re getting the highest rates.

Learn more about the CIT Savings Connect account.

CIT Bank. Member FDIC.

CIT Savings Builder Account

And if you’re looking for another option from this online bank, you can do worse than the CIT Savings Builder Account. This high-yield savings account offers an interest rate of up to 1.00% with a low minimum initial deposit requirement of $100. There is no minimum balance required to keep your account, but your balance will determine your interest rate. See details here.

The CIT Savings Builder Account uses a tiered rate structure with a loophole. The balance tiers and interest rates are:

<$25,000 – 0.40% APY
<$25,000 – 1.00% APY if you make a monthly deposit of $100 or more
>$25,000 – 1.00% APY

If you can’t afford to put away more than $25,000, no worries. Just schedule an automatic transfer of at least $100 from a linked bank account to get yourself into the higher tier. This can also help you make saving a priority.

Because of the tiered interest rate structure, this high-yield savings account is ideal for people who plan to keep high balances and/or make regular contributions to their savings.

Learn more about the CIT Savings Builder Account or read our full review.

CIT Bank. Member FDIC.

Great alternatives

These accounts didn’t make our top three, but they still have a lot to offer, especially if you’re looking for an online savings account.

Axos Bank High-Yield Savings Account

Features

Minimum balance: $0
Minimum deposit: $250
APY: Up to 0.61%
Monthly fees: None

An Axos Bank High-Yield Savings Account is the right high-yield savings account for anyone looking to keep a low balance. There is a minimum deposit requirement of $250 to open an account, but any amount you save will earn interest. Axos uses a tiered rate structure but actually pays the highest rates on the lowest balances. You’ll earn 0.61% as long as your account stays below $24,999.99.

Each account comes with a free ATM card upon request for easy withdrawals. Plus, you can earn a referral bonus of $20 for every friend who opens an Essential Checking account using your unique link.

Open an Axos savings account or read our full review.

High-Yield Chime® Savings Account

Features

Minimum balance: $0
Minimum deposit: $0
APY: 2.00%⁷
Monthly fees: None²

The High-Yield Chime Savings Account is a great online savings account that does your saving for you. With the Round Up Transfer and Save When I Get Paid features, you can completely forget about your saving and still make progress toward your goals. Round Ups will send the spare change from your purchases right to your savings^ and Save When I Get Paid lets you transfer up to 10% of each direct deposit of $500 or more to your savings account ¹. A Chime Checking Account is required to be eligible for a Savings Account.

This account charges no maintenance fees and has no minimum deposit or balance requirements. Check out Chime checking if you like the idea of saving and banking in one place with a platform that’s easy to use*.

Read our full review.

* Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.
^ Round Ups automatically round up debit card purchases to the nearest dollar and transfer the round up from your Chime Checking Account to your savings account.
¹ Save When I Get Paid automatically transfers 10% of your direct deposits of $500 or more from your Checking Account into your savings account.
² There’s no fee for the Chime Savings Account. Cash withdrawal and Third-party fees may apply to Chime Checking Accounts. You must have a Chime Checking Account to open a Chime Savings Account.
⁷ The Annual Percentage Yield (“APY”) for the Chime Savings Account is variable and may change at any time. The disclosed APY is effective as of November 17, 2022. No minimum balance required. Must have $0.01 in savings to earn interest.

Capital One 360 Performance Savings Account

Features

Minimum balance: $0
Minimum deposit: $0
APY: 3.00%
Monthly fees: None

Opening a Capital One 360 Performance Savings account might be the way to go if you’re looking to automate your saving with a familiar consumer bank. This account pays the same interest rate of 3.00% on all balances and doesn’t cost anything to open. To stay on track with your saving, you can schedule recurring transfers from a Capital One or external account.

If you already have an account with Capital One, you’ll be able to make quick transfers from the app. Finally, there are Capital One branches and ATMs all over the country if you like the option of banking in person.

Open a Capital One savings account or read our full review.

Marcus Online Savings Account

Features

Minimum balance: $0
Minimum deposit: $0
APY: 2.50%
Monthly fees: None

Marcus by Goldman Sachs is an online-only bank owned by investment company Goldman Sachs. A Marcus Online Savings Account is ideal for people who want control over their savings and like to strategize different ways to grow their money. This account offers a variety of tools and extensive research to help you make informed decisions with your savings and track your progress. You can even see exactly how much interest you’ve earned from the app.

You’ll earn 2.50% regardless of your balance and there’s no minimum deposit.

Open a Marcus savings account or read our full review.

What is a high-yield savings account?

A high-yield savings account offers a higher yield than traditional savings accounts. How much higher completely depends on the market and the institution, but may be as much as ten or fifteen times the average. You might also hear the term high-interest savings account used — this is the same thing.

Right now, the national average interest rate on a savings account is 0.37%, according to the Federal Deposit Insurance Corporation or FDIC. The FDIC determines rate caps each month using the average interest rates for savings accounts, checking accounts, money market accounts, and certificates of deposit across all banks and credit unions.

How savings account interest works

There are two different ways interest can work with high-yield accounts. The first is to earn a variable interest rate and the second is to earn a tiered interest rate.

A high-yield savings account with a variable rate will pay the same interest rate on any balance. A savings account that uses a tiered interest structure will determine your rate based on your average balance and pay you according to which balance tier you fall into.

With a tiered interest rate, you often earn more interest the higher your balance is. This is to incentivize people to keep more money in their accounts. With a variable interest rate, it doesn’t matter what your balance is as long as you meet the minimum balance requirements (if there are any).

To make things a little more confusing, sometimes a bank or credit union will use a tiered interest rate structure but make the interest rate the same for every balance tier. All interest rates for online savings accounts are subject to change at any time.

Before you apply for an account, find out what rate you’ll qualify for with your balance and activity. Don’t get tricked into opening a high-yield savings account for the great interest rate unless you know you’ll actually earn that rate.

For example, a bank may advertise a high-yield savings account with an interest rate of 3.00% APY, but this rate only applies to balances over $15,000. The difference between the highest and lowest interest rates can be significant, so make sure you don’t get stuck with a lousy rate.

Read more: How to get the best savings account interest rate

What is the annual percentage yield (APY)?

Annual percentage yield is the rate of return you will earn calculated as a percentage of your savings account balance. You’ve probably noticed that the APY on an account is very slightly different from the interest rate. This is because the interest rate only shows simple interest.

The annual percentage yield or APY shows how much interest you can earn each year if you don’t take any of your money out. We like to look at the annual percentage yield rather than just the interest rate because it factors in compounding interest.

To estimate how much you can earn on a high-interest savings account, multiply the APY by your balance to see how much your account will grow if you don’t touch it.

When is interest calculated?

Interest may be calculated daily, weekly, or monthly for a savings account. This is how often your balance is used to determine how much interest you’ve earned.

This frequency can affect your earnings, and daily calculation is the best-case scenario. This is because the more frequently interest is calculated, the higher your balance will be each time it happens thanks to the interest you’ve already been paid. Interest you earn on interest is referred to as compound interest.

For example, a $1,000 balance earning a 1% interest rate pays you $10 in simple interest over a year. If interest is calculated daily, that $10 becomes $10.05 a year.

Read more: Savings interest calculator

Is interest taxed?

Yes, the interest you earn from your savings account will be taxed alongside your income, no matter how much money you bring in.

How to open a high-yield savings account

The basic process for opening a savings account is pretty much the same anywhere you go.

First, you’re going to provide some personal details including your basic contact information. Once your account has been approved, you’ll choose a funding option. Your options might be:

ACH transfer
Wire transfer
Direct deposit
Check deposit (paper or mobile)
Cash deposit

You need to meet minimum opening deposit requirements for your account when funding. Some banks will let you open a savings account without making a deposit right away. Just make sure you know the rules for your chosen account.

If you already have an account with the bank or credit union you’ve chosen, you can link this with your new savings account either before or after funding. This will allow for easy transfers in the future.

How to use a high-yield savings account

There’s a difference between just having a high-yield savings account and using it for all its worth. Here are some ways to make the most of high-interest savings.

Emergency fund

A high-yield savings account is the perfect place to keep your emergency fund. We recommend you have one savings account where you keep at least six months of your monthly living expenses, completely separate from the rest of your cash. You can take the money out if you get sick, lose your income, or face a large unexpected expense, and your balance will grow until then.

Short-term saving

A high-interest savings account is also a great place to save for short-term goals when you don’t want to put your money on the line with higher-risk investments. These accounts are safe and liquid, so your money is there when you’re ready for it and earning interest when you’re not.

For example, if you’re saving money to buy a new car or for your wedding in the next couple of years, you may be able to get a higher rate of return by investing in a mutual fund or other securities. But in such a short period of time, you may lose money. Investments are best for savings goals more than a few years away. For shorter-term goals, savings accounts are safer.

No matter what you’re saving for, a good rule of thumb is to save as often as possible and think about it as little as possible. If you rely on yourself to remember or feel like putting away money to save, you might have more trouble meeting your goals and start feeling frustrated when you don’t see your balance go up. Instead, take advantage of features that do the work for you. To save automatically, you can:

Set recurring transfers
Split your paycheck
Use booster features like roundups

Read more: The best place for short-term savings

What is the withdrawal limit for savings accounts?

Most savings accounts limit the number of withdrawals you’re allowed to make. This started with Federal Regulation D.

Federal Regulation D was a rule that limited the number of withdrawals or transfers that could be made from a savings account to six per month. This included withdrawals made in person, by phone, online, or through any other type of electronic transfer. If you made more than six transfers or withdrawals in a month, your bank might have charged you an excessive withdrawal fee or closed your account.

In April 2020, Regulation D was suspended, but many banks still choose to restrict transactions and enforce the same penalties.

What to look for in a high-yield savings account

There are certain standout features that can immediately make or break a high-yield savings account.

Here are the main things to pay attention to when shopping for a savings account.

Minimum balance requirements

How much do you realistically plan to save? This is the first question you should ask yourself before signing up for an account. Many savings accounts have minimum balance requirements, and you won’t be doing yourself any favors if you open an account and can’t meet these.

If your account does have balance requirements, you must meet them in order to:

Avoid monthly maintenance fees
Earn interest
Keep your account

Your balance at the end of each day is used to determine if you’re meeting requirements. If you’re not, you might be penalized.

Not all high-yield savings accounts have minimum balance requirements. Especially for online savings accounts, it’s becoming more common to not have any.

Read more: How much money should you save each month?

Minimum deposit requirements

Some banks may require you to make a certain minimum deposit when signing up for your account. Failure to do so may disqualify you from opening an account or result in a fee.

A minimum deposit requirement could be anywhere from $5 to $500. Sometimes minimum deposit and minimum balance requirements are the same, and sometimes not. It’s not uncommon for a bank to have a minimum deposit requirement but no minimum balance requirement or vice versa.

Many high-yield online savings accounts have very low or no minimum deposit requirements.

Interest and APY

You’re naturally going to gravitate toward accounts with the highest interest rates, right? That’s free money that you don’t have to work for. But be sure to pay attention to the requirements to earn interest too, not just the annual percentage yield.

For example, if a bank requires you to maintain a balance you can’t maintain to earn interest, it’s probably not the right bank for you. For your first savings account, you might prefer a variable interest rate over a tiered interest rate so you don’t have to worry about if your balance is high enough to earn interest.

Some banks also reserve their best interest rates for preferred customers. This might mean you need to have another account such as a checking account or loan to qualify for the highest APY, and that might be more trouble than it’s worth.

Monthly fees

Some banks still charge monthly maintenance fees on savings accounts, but many don’t. When your goal is to earn money on your savings, monthly fees you get charged just for having an account can really get in the way.

While you should generally look for accounts that don’t charge fees, you might make an exception if a bank offers a waiver. For example, the fee may be waived if you maintain a certain minimum balance in your account for each statement cycle or make a recurring transfer from another account.

If you feel like you can easily meet the requirements to waive a fee and an account is otherwise a perfect fit, go for it.

Cash access

Most people try to ignore the money in their high-yield savings account when they can to take advantage of compound interest.

But life happens, and sometimes you need to dip into your savings. When that happens, you should have convenient access to your money. You might be able to make a withdrawal via:

ACH transfer
Cash withdrawal
ATM withdrawal

Most savings accounts give you the option to make a transfer from your savings to a linked checking account. This checking account can either be with the same bank or another one entirely. If with the same bank, transfers may be instant.

Some banks also offer ATM cards with high-yield savings accounts, though you may incur a fee for ATM transactions. You can also make cash withdrawals at branch locations.

Any transfers or withdrawals you make will count toward your monthly transaction limit.

Mobile apps

Almost every bank out there offers a mobile app today, but some are far better than others. As you’re researching the features of an account, always look into the app too.

Saving from your phone only works when an app does what it’s supposed to, so functionality and convenience are important. You should be able to easily access your savings account, initiate transfers, and see your balance at any time. Those are the basics. You might also want an app that will let you make mobile check deposits, create savings goals, and chat with customer support when there’s an issue.

As a rule, online banks and larger institutions tend to have the best mobile apps. But while you might be looking for an app that’s simple and straightforward to use, someone else might prefer a robust app with educational resources, features, and a variety of notifications. Check out some customer reviews to see what real users have to say about their experiences.

Sign-up bonus

Many banks and credit unions offer sign-up bonuses when you open a high-yield savings account. These offers change all the time and can be quite enticing. For example, bonuses up to $200 are not uncommon. But while sign-up bonuses are nice, they’re not more important than interest rates, fees, and minimums.

Also, be aware that sign-up bonuses come with restrictions. Typically, you’ll need to maintain a certain minimum balance for a set amount of time to qualify. This may be six months or even longer. If your account balance drops below the minimum requirement at any time during the first six months, you may forfeit the bonus. Many bonuses also come with direct deposit requirements.

If you do qualify, you probably won’t get the bonus right away and may have to wait several weeks. All this to say that sign-up bonuses aren’t a good option for getting quick cash. Consider these after all of the other features we’ve outlined.

Are high-yield savings accounts safe?

Your money can’t get a lot safer than it is when it’s in a savings account.

Almost all savings accounts with banks are protected by the Federal Deposit Insurance Corporation (FDIC) and insured for up to $250,000 per depositor. This insurance coverage protects your money in the event that your bank loses money and is unable to repay its deposits. Almost all savings accounts with credit unions are protected by the National Credit Union Administration (NCUA) for up to $250,000 per depositor. This provides the same protections.

If a bank or credit union is not FDIC- or NCUA-insured, you may qualify for private deposit insurance.

Benefits of online savings accounts

High-yield savings accounts and online savings accounts are often one and the same. Here are some of the top benefits you can expect from an online savings account.

Higher interest

A traditional savings account with your bank or credit union might seem like the best choice, but you can do a lot better. Compared to traditional accounts, online savings accounts tend to offer much better interest rates, plus benefits like fewer fees, extra savings features, and the convenience of opening and managing your account completely online (or from your phone).

Online savings accounts can pay higher interest rates because digital accounts are cheaper to operate, lowering a bank’s costs and passing on the savings to you in the form of better interest.

Fewer fees

Online savings accounts almost always have lower fees than traditional savings accounts for the same reasons they can offer better rates. Many charge no monthly fees at all.

Avoiding monthly fees like maintenance fees, low balance fees, and inactivity fees can save you serious money in the long run. Plus, let you actually keep the interest you’ve earned.

Convenience

Online savings accounts are much more convenient to open and use. You can open your account online and fund it by just transferring the money from another account. Usually, all of this takes less than five minutes.

An online account lets you make deposits, transfer money, pay bills, and see your account activity at any time without the need for a phone call or visit to the bank. You can even view your account statements and track your progress. If you’re not a fan of brick-and-mortar branches, an online savings account either with a fully-digital bank or a hybrid bank could be perfect for you.

Perks and benefits

Online savings accounts tend to come with a lot of great, free features. Automatic transfers into your savings account from your checking account, mobile check deposit, and account alerts are just a few common ones.

Some online savings accounts go above and beyond this. They might offer savings support like boosters and automated tools, help you create a saving strategy with resources and insights, or the option to organize your savings into separate buckets or categories.

Read more: Best online savings accounts

Disadvantages of savings accounts

Although a great tool for saving for your future and protecting your finances, savings accounts in general do have limitations. Let’s talk about some of those here.

Limited withdrawals

One of the main disadvantages of high-yield savings accounts is limited cash access. A lot of this has to do with withdrawal restrictions.

Remember, you’re often restricted to just six transactions per statement period with a savings account. This is a limit that was originally set by the federal government that many accounts still stick to. You shouldn’t use your savings account as a secondary spending account because when you hit that limit, you risk losing the account. This is why savings accounts should be for money you don’t immediately need.

If you’re looking for a place to set aside some extra money you do plan to dip into regularly, consider a high-yield checking account instead of a savings account. While the rates for high-yield checking accounts aren’t usually as good as the rates for high-yield savings accounts, you’ll have more flexibility to spend your money.

Read more: Best high-yield checking accounts compared

Rates can change at any time

Another downside to savings accounts is that the interest rates are always variable. This means the rate you earn on your balance can change at any time, and it definitely will as the market fluctuates. It’s important to remember that you’re not locked into the annual percentage yield you sign up for when you open a high-yield savings account.

And if the rate does change, your bank doesn’t have to give you any sort of warning. Although competitive high-yield savings accounts will, for the most part, stay competitive and continue offering the highest yields compared to other accounts, there’s no telling how much you’ll earn in dividends a year from now.

You should choose a high interest rate but know that it can change and don’t rely on the dividends for income.

Security risks

With any type of financial account, there are going to be certain safety concerns. While these are really minimal with an insured savings account, you can take steps to maximize your personal security.

If an account offers multi-factor authentication, set it up (it’s free anyway). If you have the option to enroll in fraud protection, do it. Set up account alerts to notify you about suspicious activity and check your balance often to make sure everything looks good.

FDIC and NCUA protection will keep you safe from losing all of your money if your bank goes bankrupt, but it’s your responsibility to make sure your account is as safe as it can be from hackers.

Read more: How to make online banking more secure

Are high-yield savings accounts worth it?

The answer to this question is probably, but it really depends on what kind of account you choose. We’ll say it again, we always prefer an online savings account with no minimums and no fees. Even if you can’t yet afford to set much money aside, you can start earning a small amount of interest on your balance and setting those good savings habits with free accounts.

But if you open a savings account that charges monthly maintenance fees, overdraft fees, low balance fees, etc., you’re going to have to work harder to make the account worth it. Keep in mind that all of these fees can eat into and even exceed your interest earnings, causing you to lose money in the long run.

So basically, as long as you don’t make the mistake of choosing the wrong account and letting it drain your earnings, you have nothing to lose.

High-yield savings accounts vs. money market accounts (MMAs)

Which is the better option for your money right now: a high-yield savings account or a money market account?

A money market account or MMA is a special type of savings account. They typically have higher balance requirements to earn interest but may offer better interest rates than high-yield savings accounts. Usually, MMAs pay tiered variable interest rates so the more you save, the more you earn.

MMAs often come with higher fees, higher deposit requirements, and higher balance requirements than savings accounts. While they can earn more depending on the interest rate environment, right now the best rates are really comparable between high-yield savings accounts and MMAs.

Savings accounts and money market accounts have the same transaction limit of six per statement period.

Read more: 9 best money market accounts

High-yield savings accounts vs. certificates of deposit (CDs)

A certificate of deposit or CD is a type of deposit account that usually offers a fixed interest rate for a fixed term. This means that the amount of money you earn on your deposits is guaranteed for the length of the CD term.

CD terms can range from as little as one month to as much as 10 or even 20 years. During the term of the CD, you agree not to withdraw any of the money you’ve deposited. If you do need to access your money before the end of the term, you’ll pay an early withdrawal penalty fee.

Early withdrawal fees are equal to the interest you earn for a set number of days or months. For example, you may pay three months’ interest for taking money out of a one-year CD early.

Because of early withdrawal fees, you risk losing your interest in a CD, so you should only deposit money you’re absolutely certain you won’t need until the term is up.

Stick with a savings account until you have an emergency fund built up before you consider a CD. CDs can be better vehicles for long-term saving but they should not replace your emergency savings account.

Read more: Best CD rates of 2023

Source: moneyunder30.com

Apache is functioning normally

June 7, 2023 by Brett Tams

By Peter Anderson 3 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 28, 2013.

Assuming you are investing for future retirement, you should seriously consider the Roth IRA (Individual Retirement Account). I am already a huge fan of the Roth, but as the national debt increases with each federal bailout, the Roth is looking better all of the time. Let me explain why.

Save Taxes on Down The Road With The Roth IRA

With the traditional IRA, you get to deduct the contribution for the tax year it was made, but you will pay taxes when you start drawing the money out for retirement. So whatever your tax rate is in retirement, that’s what you’ll be paying.

The Roth, on the other hand, is purchased after you have paid your taxes and is therefore tax free when withdrawn. Nothing like getting tax free withdrawals in retirement and not having to worry about paying taxes, right?

When deciding which one is best for you, conventional wisdom is that if you believe you will be in a lower tax bracket when you retire, you are better off with the traditional IRA. Why? Because you were able to claim a tax deduction at a higher percentage, but pay those taxes later at a lower percentage.

Will Tax Rates Get Cheaper?

But I ask you: do you seriously believe that the tax structure when you retire will be essentially the same as it is today? Is it possible that even if your retirement income is less than your working income, your tax rate could be higher than it is today?

I just don’t see how we can ever pay down our $10 trillion national debt without hiking taxes. My longhand math (calculators don’t have that many zeroes) indicates that we owe $30,000 for every man, woman and child in America.

To compound the problem, the Social Security Trust Fund is scheduled for depletion in about 30 years unless “something” is done. That ”something” will have to be higher taxes or less benefits.

Our future tax structure is very uncertain because of our national crash course with debt. Pay your taxes today with a Roth instead of gambling your retirement on the uncertainty of future tax rates.

Tax rates aren’t the only reason to be checking out the Roth IRA. Check out this list of 10 Reasons To Own A Roth IRA. Among the reasons that you’ll find include the flexibility of being able to withdraw your contributions (but not earnings) at any time, being able to save for college or home costs in the account and being able to diversify your tax treatment on your retirement accounts if you continue to have a traditional IRA as well.

More Roth IRA Details

Want some more infomation on the Roth IRA, who is eligible, how much you can contribute and more? Check out these articles on 2013 Roth IRA rule changes, phaseout limits on the Roth, who is eligible for the Roth IRA and everything you need to know about the Roth Conversion Event.

Joe Plemon of Plemon Financial Coaching is the Money Columnist for The Southern Illinoisan.

Source: biblemoneymatters.com

Apache is functioning normally

June 7, 2023 by Brett Tams

The maximum monthly Social Security benefits a person can get in 2023 is $4,555 if they wait until age 70 to claim their benefits. The maximum amount of benefits a married couple can receive would be $9,110 if both of them are separately able to claim the maximum amount of $4,555. But there are a lot of caveats and other things to understand about maximizing your Social Security benefits—let’s take a deeper dive. If you’d like personalized assistance preparing for retirement, consider working with financial advisor.

What Are Social Security Benefits?

The Social Security Administration provides retirement income to most American workers as well as benefits to qualifying disabled people. Qualifying retirees can begin their Social Security benefits between the ages of 62 and 70. The longer you wait, the higher your monthly payments will be.

For instance, a single person born in 1970 that made $70,000 in annual income would get $27,588 in annual Social Security benefits if they started taking their benefits when they turned 62. If that same person waited until the age of 70 to claim Social Security, their annual benefits would be $48,993. You can get an estimate of what your annual Social Security benefits will be at different ages and different average incomes with SmartAsset’s free calculator.

How Do Benefits Differ for Single People and Married Couples?

First, it’s helpful to know how Social Security benefits are calculated. There are two main elements to figuring out how much money you’ll get each year from Social Security.

Averaged indexed monthly earnings: The Social Security Administration will take a look at the amount you earned each month over up to 35 years of employment. They’ll identify the years where you earned the highest amounts, then average your monthly earnings.
The age at which you retire: As discussed above, the longer you wait to receive your Social Security benefits, the larger your payments will be. You can receive your benefits as early as 62, but by waiting a few years you will see larger amounts.

In many cases, married couples will collect two separate Social Security checks based on their own earnings record and the age at which they decided to claim their benefits. Rather than having a maximum married benefit limit, the maximum amount they would receive would be double the maximum benefits for a single person.

This is different in the case of a spouse that didn’t work or didn’t work long enough to qualify for Social Security benefits. These people will often qualify for spousal benefits instead, which max out at half of the working spouse’s Social Security benefit amount. Again, the maximum amount of the benefit will be determined by when you choose to begin claiming benefits and, in this case, your spouse’s average earnings over their lifetime.

What’s the Maximum Social Security Benefit Married Couples Can Receive?

In 2023, if you retire at your full retirement age, the maximum monthly Social Security retirement benefit would be $3,627. For a married couple who are both receiving the maximum amount and both retired at full retirement age, that amount would be $7,254. That amount would be less for a person who retires at age 62 ($2,572) and more for a person who retires at 70 ($4,555).

So for example, if a married couple both qualified for the maximum amount and both held off on claiming their Social Security benefits until age 70, they could receive $9,110 in monthly benefits in 2023. A married couple in which one spouse didn’t work and instead qualified for spousal payments would max out at $6,832.50—the maximum benefit for the working spouse and half that for the spouse that didn’t work.

How Can I Get the Maximum Social Security Benefit?

To ensure that you qualify for the maximum benefit of $4,555 a month, you’ll need to work for 35 years earning a salary that is equal to or greater than the wage cap for that entire time. In 2023, the wage cap is $160,200.

However, only a very small percentage of workers will qualify for the maximum amount. In 2021, the Congressional Research Service reported that only about 6% of workers earned more than the wage cap amount, a percentage that has remained “relatively stable” over time.

To earn the highest benefit possible as a married couple, both partners should try to earn as much as possible during their working years and put off claiming their benefits until as close to age 70 as possible.

The Bottom Line

The maximum monthly Social Security benefit of $4,555 is only available to high earners who wait to claim their benefits until the age of 70. The maximum benefit a married couple could collect would be twice that—$9,110—and require both of them to earn $160,200 or more over 35 years of work. Stay-at-home spouses who haven’t worked enough to qualify for their Social Security benefits can claim spousal benefits of up to half of their spouse’s monthly benefits.

Retirement Planning Tips

A financial advisor can offer advice on any of your Social Security, Medicare or retirement savings needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re not sure you’ve saved enough for retirement, our retirement calculator can help. Use it to determine your estimated Social Security benefits, how much money you need to retire and how much annual income you’ll need in retirement.

Photo credit: ©iStock.com/kiattisakch, ©iStock.com/ljubaphoto, ©iStock.com/yacobchuk

Source: smartasset.com

Apache is functioning normally

June 7, 2023 by Brett Tams

This year, it happened — something many have been predicting for years: Taxes went up. And most likely, the hikes will just keep coming. There’s no other way to pay off the country’s debt and fund the ballooning entitlements due the baby boomers as they retire. The increases may not affect everyone, and those who earn more will pay more, but someone’s gotta pay.

One way to hedge against higher tax rates is to contribute to a Roth retirement account. Your contributions aren’t tax-deductible, but the withdrawals are tax-free once you turn 59 ½ and you’ve had a Roth account for at least five years. Who wouldn’t want tax-free money if tax rates are just going higher?

Well, as attractive as the Roth can be, it’s not always the best choice for everyone. You see, a contribution to a Roth means you are forgoing a contribution to a traditional retirement account, which might give you a tax-deduction today in exchange for paying taxes in retirement. So the choice is: Should you pay taxes today or in retirement?

Here’s the rule of thumb: If you’re in a higher tax bracket today than you will be in retirement, stick with the traditional account. However, if you expect to be paying a higher tax rate in your golden years, go with the Roth. The same math applies when considering a “conversion,” which is turning a traditional account into a Roth. The amount in the traditional IRA that comes from deductible contributions or investment growth is taxed as ordinary income in the year of the conversion, but then it grows tax-free.

That’s all handy-dandy, but there’s one problem: While it’s a safe bet taxes will go up, it’s difficult to predict what that will mean for any given individual. Still, here are some considerations:

For many reasons, such as a drop in income, most people pay fewer taxes in retirement than they did while they were working. Plus, it’s likely that senior citizens, as a group, will bear the smallest brunt of future tax hikes.
Make sure to factor in the difference in tax rates between the state where you currently live and the state to which you’ll retire, if you plan to move.
A traditional vs. Roth calculation assumes that any tax savings from contributing to the traditional account is invested and saved for retirement. If you’ll instead spend those tax savings, then the Roth looks much more attractive.

As an example, consider the situation of a Motley Fool reader, who posted his Roth conundrum on one of our discussion boards. He’s in the 33 percent federal tax bracket, and pays a 9 percent state income tax to boot. It’s possible he’ll move to Texas after he retires, which is among the seven states that don’t have an income tax. (The others include Florida and Nevada, also popular retirement destinations.) So if he were to contribute $10,000 to a Roth rather than a traditional account, he’d be giving up on a $4,200 tax deduction, factoring in both federal and state taxes. He’s better off sticking with the traditional account, especially factoring in the possible move to Texas.

Sneaking in through the backdoor

The fellow can contribute to a Roth 401(k) because his employer offers the option. Otherwise, he’d be out of luck since his income makes him ineligible for a Roth IRA. Once you earn a modified adjusted gross income (AGI) of $112,000 if you’re single or $178,000 if you’re married, your ability to contribute gradually phases out.

However, all is not lost for those who don’t have a Roth account at work, are ineligible for a Roth IRA, or have already maxed out their 401(k)s. It gets complicated, so stick with us.

First off, not all contributions to a traditional IRA are deductible. If you have a plan at work and are single with an AGI of $59,000 or are married and have an AGI of $95,000, your ability to deduct the contributions gets phased out. If you’re above those income limits, you can make a nondeductible contribution to a traditional IRA. As the name implies, you can’t deduct the contribution, but the investments still grow tax-deferred.

Now, here’s where the Roth comes in. If you don’t have any pretax money in traditional IRAs, including SEPs, SIMPLEs, and rollovers from prior employers’ plans, you can immediately convert that traditional IRA to Roth. (And by “you,” we mean that you can ignore what your spouse has.) Here’s the real bonus: Because you couldn’t deduct the contribution and because the account didn’t have an opportunity to grow, you won’t owe any taxes on the conversion. This little trick has become known as the “backdoor Roth.”

It gets complicated if you have pretax money in a traditional IRA, since the amount is prorated across all the accounts for tax purposes. For example, if you have $50,000 in pretax IRAs, and then you make a nondeductible contribution of $5,000 to a traditional IRA and immediately convert that account to a Roth, only 10 percent ($50,000 divided by $5,000) will be tax-free. However, there’s one possible way around this. You can transfer those pretax assets to your existing 401(k), if your employer allows it. The downside: 401(k)s have limited and often pricier investments, and most don’t allow individual stocks and bonds.

Finally, based solely on the math, younger people in the 15 percent or lower tax bracket who expect to build up a large portfolio over their careers should choose the Roth.

Other benefits of the Roth

That’s the math. But there are other perks to the Roth that might tip the scales in its favor if the math is fuzzy.

Contributions to a Roth IRA – not earnings – can be withdrawn tax- and penalty-free before age 59 1/2. This has its downsides, since it makes it more tempting to spend money that should be left for retirement. But there are some proponents of using the Roth IRA as a college savings account, and even an emergency fund.
Unlike the traditional IRA and 401(k), the Roth IRA does not have required minimum distributions (RMDs) at age 70 ½. The Roth 401(k) does, but you can transfer the money to a Roth IRA after you retire to get around RMDs.
Anyone who inherits a traditional IRA will have to pay ordinary income taxes on the distributions. However, the Roth account will still maintain its tax-free status. And nothing says “I love you” like giving someone tax-free retirement savings. (However, all retirement accounts are included in the calculation of whether estate taxes are due.)

The bottom line

We know the direction of tax rates (i.e., up), but we don’t know the magnitude and the targets. They’re decided by Congress, and who knows what those folks will do? Of course, they didn’t put themselves in office, which means the decision ultimately lies with the voters — and they can be even crazier. Some people argue that we can’t even assume that distributions from a Roth will remain tax-free. But just as diversification is important in your portfolio, tax diversification can also make sense. For many retiree wannabes, one way to hedge against future significant tax increases is to have at least some assets in a Roth account.

Source: getrichslowly.org

Apache is functioning normally

June 7, 2023 by Brett Tams

By Jason Price 4 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited April 18, 2014.

If you’ve read about mutual fund investing, or perhaps discussed it with someone knowledgeable on the subject, the topic of fees and expenses most likely came up in the conversation. For someone who isn’t a financial advisor or broker, mutual fund fees and expenses can be quite a confusing subject. How do you know when you’re paying them and how can you (or should you) avoid them?

Obviously, the more you can minimize fees and expenses when investing in mutual funds, the more you can maximize your returns. That seems like a good thing, right? So, let’s explore what these fees and expense are and how they can sneak up on you if you don’t have some knowledge of the subject.

Mutual Fund Operating Costs

These expenses are required to operate or manage the mutual fund. The management of a mutual fund requires certain costs such as brokerage fees, marketing, legal, accounting, etc. They are typically paid out of fund assets, so investors indirectly pay them.

Within the operating expenses you may find 12b-1 fees. These fees are used for advertising and selling the funds. According to the Sound Mind Investing handbook, more than two-thirds of all stock funds charge some marketing related expenses to shareholders.

Sales Charges or Loads

There are funds with loads and without loads. No-load funds don’t charge you any fees when you buy or sell the fund. You typically buy the funds yourself versus working with someone who sells them to you. A load fund includes a sales charge when you work with a financial planner, insurance agent or with a stock broker. The load is a sales commission for their services to help you find a fund.

There are different types of loads, so you have to be knowledgeable to understand what you may be charged.

Class A Funds

Class A funds are the easiest to understand. The front-end sales commissions are charged up front when you purchase the fund. They tend to have lower 12b-1 and operating expenses.

Class B Funds

A back end load, or class B fund is handled differently and can be the trickiest to understand. Back-end commissions are charged on your earnings when you sell a fund within the first years of owning it. It’s usually 5% the first year and decreases a 1% per year for 4 or 5 years. Brokers are paid through 12-b1 marketing fees included as a line item in the operating expenses of the fund. These expenses are usually the highest, so keep in mind you’re still paying even thought there isn’t any front-end sales charge.

Class C Funds

Finally, a class C fund doesn’t charge any front end or back end sales load. The fund charges the 12-b1 marketing fees for every year you own the fund. Brokers are usually paid on a quarterly basis from these fees.

Don’t Think You’re Not Paying

I started working with a financial advisor a few years ago who was referred to me by my employer. It was one of those situations were the financial institution was asked to help employees with retirement planning. I decided to roll – over a previous 401(k) into an IRA and also asked for some retirement planning advice.

I was foolish to think the services were free. I said I wanted to avoid funds with sales loads, but I really didn’t know what I was talking about. The mutual funds which I was advised to purchase were Class C funds. I suppose this is fine given I didn’t want to take the time to pick funds myself, but I do know now I’m paying for the services I requested.

As I become more informed, I’ll transfer my IRA to a discount brokerage account to manage myself, or consider fee based financial planning where I pay the broker a fee for his services versus by the commissions or 12-b1 marketing fees from my investments.

I suppose loads or the marketing fees are fine if you want someone else to make the investing for you. But, studies say these funds don’t produce any better results than no load funds.

Final Thoughts

To wrap up, I’d like to remind you (and me) that we are financial stewards. Not only is it our responsibility to plan a budget each month and spend responsibly; we are to manage investments wisely and know the conditions of our flocks.

Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations (Proverbs 27:23-24).

I don’t think I knew the conditions of my flocks very well by not considering the costs associated with my investments. To increase your knowledge I recommend The Sound Mind Investing Handbook by Austin Pryor. The book is a step-by-step guide to managing money and investments from a Biblical perspective. It has helped me get a better understanding of investing in general and the expenses and fees associated with some mutual funds.

Another good resource to consider using is a handy mutual fund cost calculator from the US Securities and Exchange Commission website. The SEC Cost Calculator estimates the cost of investing in any mutual fund. You just need to have the mutual fund prospectus and your investment information to get the inputs.

What about you? I’m interested in getting your thoughts on paying mutual fund loads. Good or bad? Or, is it okay for someone to own load funds and rely on someone else to help pick your investments for you as long as you know the condition of your flocks?

Resources

Source: biblemoneymatters.com

Apache is functioning normally

June 6, 2023 by Brett Tams

Reaching financial independence is like the holy grail of financial goals. After all, the ability to no longer need to work for money to live on is incredibly enticing.

Just imagine what you could do with that newfound freedom!

But the path to financial independence (or FI for short) is usually not glamorous. It requires hard work and dedication to make steady progress towards your ultimate goal of FI. But there are some strategies that can help you achieve your goal of financial independence.

Let’s take a look at these expert tips from people who have actually reached FI, or are seriously dedicated to the path of achieving it. You might find a tip that helps to transform your financial trajectory.

What’s Ahead:

1. Identify your “FI number”

Financial independence happens once you have enough money saved and invested to never need to work another day in your life. Although you might decide to work at a job you love, there is great freedom in knowing that you’ll never have to work another day in your life.

A big part of the financial independence journey is determining just how much money you’ll actually need to make this dream a reality. That number is your FI number, the goal that you should strive for when you decide to seriously pursue FI.

Although there are a few different schools of thought about how to calculate your FI number, this general rule of thumb is a great place to start:

Your annual expenses x 25 = your FI number

Personally, I am at the beginning of my journey to FIRE (Financial independence/retire early). I’m only a small part of the way to achieving the FI number that I have in mind.

But having mine in mind has helped me stay motivated to save extra diligently. I highly recommend nailing down what your FI number is, too. You might be surprised by how much having a concrete goal in mind keeps you focused on the savings goal — at least that has helped me so far!

2. Pay down debts that stand in your way

Net worth is a big part of achieving financial independence. When you check out your net worth, the debts you have will drag this number down.

With that in mind, David Alyor, recommends paying off your debts as soon as possible. As a lawyer in the final stretches of his financial independence, he says,

“After almost a decade of post-secondary studies, paying off student debts was painful, but I stayed the course and paid as aggressively as I could to get rid of my debts as quickly as possible.”

Alyor says the key to his success with debt repayment was to make a written repayment plan. Additionally, he regularly checked in with his shrinking loan balances to stay motivated along the way. He expands,

“If you’re finding it tough to make as much progress as you’d like, it’s time to look for a side hustle to increase your income earning potential and drop your debt even faster.”

3. Avoid lifestyle inflation

Lifestyle inflation is easy to justify. After all, shouldn’t you take advantage of the best that your paycheck can buy as it increases? If you are trying to achieve financial independence, then saying no to lifestyle inflation is critical.

James Diel, CEO of Textel, achieved FI several years ago. Diel says:

“Saying no to keeping up with the Jones’ helped me stick to a moderate budget that included saving 30% of my monthly income toward retirement and avoiding unnecessary big purchases that get in the way of saving.”

He recommends putting this into practice by:

“making some smart money moves early on in your career and keeping your budget low without severely depriving yourself of the things you want helps you maximize your investment profits, so you can save less now and still end up with an ample nest egg.”

4. Prioritize savings

Saving for a big goal is easier said than done. This is especially true when life throws expenses your way.

But it is possible to boost your savings by making those savings a priority. Or in other words, making it a point to pay yourself first.

Minesh Patel, CEO of the Patel Firm, is so close to FI that he hopes to achieve this big goal within the year. But when he was just starting his journey to FI, he says,

“The most critical way I could save for financial freedom, even as a young graduate with a tight budget, was to pay myself first.”

Paying yourself first sounds like a great idea. But what does it actually look like in practice? For Patel, the journey began by automatically investing some of his earnings into retirement savings every month. With that, he knew that savings weren’t being compromised. Patel says:

“Somehow, being aggressive with savings up-front and seeing less in your checking account during the month makes you feel like you don’t have the money to spend frivolously.”

5. Spend on what matters to you

Kara Metcalf and her husband reached FI in their mid-thirties and left corporate jobs to RV full-time. One of her tips is to spend with purpose.

“Every dollar you spend is a dollar that you’ll never get back.”

She encourages those on the path to FI to consider every purchase as a choice to exchange time being FI in the future so that you can have that item now. She says:

“That perspective helped me adopt a minimalist lifestyle and reduced my consumerism greatly. I really didn’t need another pair of jeans when there was nothing wrong with all of the others in my closet.”

Before you make a purchase, make sure that the item is worth it to you. You’ll have to decide for yourself what is ‘worth it.’ But taking the time to think through your purchases could lead to a decrease in spending.

6. Boost your income

The savings you create must come from the difference between your spending and your investing. Unfortunately, frugality will only get you so far.

At some point, you may need to look at the other side of the equation and boost your income to increase your savings.

Sam Zelinka, the creator of Government Worker FI, is 86% of the way to his FI goal. For his family, increasing their income was a big part of working towards financial independence.

“We’ve primarily raised our income by earning promotions in our traditional job. At the same time, we both have some small side hustles that we have used to help pay off our mortgage more rapidly.”

7. Take care of yourself along the way

It is easy to let your determination to achieve FI push you beyond your limits. But pushing yourself too hard could lead to premature burnout.

Avner Brodsky achieved financial independence through entrepreneurship. He recommends taking the time to understand your limits and learning how to play within these limits. Brodsky says:

“Understanding your limitations and being okay with admitting weakness will only benefit you in your journey of learning. Taking care of your mental health is essential when working toward FI because if you are struggling, your work will struggle.”

Take whatever actions you need to take care of yourself along the way. Remember, it is absolutely okay to slow down on your journey. Don’t push yourself beyond a healthy limit.

8. Invest for the future

Adam Garcia, the founder of the Stock Dork, is well on his way to financial independence. His tip is to consider a smart investment strategy that goes beyond savings. Garcia says:

“The idea of financial independence can easily turn on its head if you follow it blindly. For most people, the most intuitive way to start is by scrimping and saving as much as they possibly can – some even manage to set aside half of their earnings every month!”

But simply saving won’t supercharge your path to financial independence. Garcia expands:

“If you want an efficient FI strategy, you need to complement your saving efforts with investment. In other words, for every penny you save, it’s good to invest another penny so that it could eventually turn into two pennies.”

For Garcia, this concept is what he calls:

“having your cake and nibbling at it, too. It’s only possible and viable if the cake is growing at a sufficient rate that your nibbling will never cause it to disappear.”

9. Don’t try to sprint to the finish line

Financial independence is a major money goal. In most cases, it will take years (or maybe even decades) to achieve.

Anthony from The Investor Handbook wants to remind us that:

“personal finance is not a sprint, it’s a marathon.”

When you are just getting started, the difference might not be noticeable. But over time, you’ll see real progress.

As you approach your journey to financial independence, Anthony recommends thinking about the journey like working out.

“A single session working on your abs won’t give you a flat stomach, but keep at it for ten years, and you’ll definitely be rocking that six-pack.”

Imagine where you could be in ten years by choosing to make progress towards your FI goals with every paycheck. The commitment to FI could transform your life through small efforts over time.

10. Focus on your own journey

Throughout every facet of our lives, it is easy to get caught up in comparisons. That holds true for personal finances, as well.

Kara Metcalf (waiting on link) recommends focusing on your own journey. She says:

“If you compare your life to your friends, family, or coworkers, you’ll usually feel deprived or lacking because you will be saving money rather than going on extravagant vacations, buying a new wardrobe each season, or eating out every day.”

For Kara, she also says that:

“In my 20s, I hated eating my packed lunch every day while my coworkers were going out to lunch. But in my 40s, those friends still get up before the sun rises every day to commute to full-time, oftentimes soul-sucking jobs. I wake up naturally (without an alarm) and spend my days exploring beautiful new places every day.”

Remember that everyone’s journey is different. Make it a priority to focus on your own goals, and stop comparing your life to others.

Summary

The path to financial independence will look different for everyone. As you navigate the journey, tailor your spending patterns to strike a balance between your current needs and your future desires.

What steps are you taking to achieve financial independence? Let us know in the comments!

Apache is functioning normally

June 6, 2023 by Brett Tams

Taxes are unavoidable but that doesn’t mean you have to pay more than you owe. What happens to your tax liability with proper financial planning? The simple answer is that it can allow you to minimize what you owe while preserving more of your income to fund your financial goals. Talking to a financial advisor is a good first step in creating a strategy for effectively managing tax liability.

Understanding Tax Liability

Tax liability refers to the money that an individual, business or organization owes to a federal, state or local tax authority. A simpler way to think of your tax liability is the difference between your taxable income and the tax deductions you’re able to claim.

As a general rule of thumb, earning a higher income can result in a higher tax liability. The U.S. uses a graduated tax system, which means that income and tax rates move together. As income increases, so does your tax rate.

The amount you pay in taxes is determined by your income, but capital gains can also affect your tax liability. That’s important to know if you’re focused on investing and building wealth, as higher net-worth individuals may face a steeper tax liability if they’re reaping capital gains from investments.

What Happens to Your Tax Liability With Proper Financial Planning?

Managing your tax liability is important as it can directly influence how much of your income or investment earnings you get to keep. The more income and assets you have to work with, the easier it becomes to build wealth.

Proper financial planning can help you implement strategies that are designed to minimize taxes while maximizing income and assets. Having a solid financial plan in place can generate significant tax savings year by year. You can then use those savings to generate additional income through investments, grow your retirement accounts and increase your net worth.

Does financial planning require you to work with a financial advisor? Not necessarily. You could always go it alone. But there are some distinct advantages to having a financial advisor help you formulate a plan for managing tax liability.

Financial advisors have extensive knowledge about how tax planning can affect your financial plan. A good advisor is also familiar with the tax code and the latest tax rules. Even if you think you have a relatively straightforward tax situation, a financial advisor may be able to pinpoint areas where you can improve tax efficiency that you might have missed.

Financial Planning Strategies for Minimizing Tax Liability

There are different ways to approach tax planning in order to reduce your tax bill, depending on the specifics of your situation. If you’re working with a financial advisor to create a tax plan, then it may include any or all of the following.

Retirement Planning

Retirement planning is a focal point of a solid financial plan, particularly with regard to taxes. Aside from ensuring that you have enough money to retire, it’s also important to consider how much of your savings you’ll be able to keep once you start making withdrawals.

In terms of how you plan for retirement, your financial advisor may suggest any of the following:

Maxing out annual contributions to a traditional 401(k) or to a Roth 401(k) if you have that option.
Contributing money to a traditional or Roth IRA each year.
Funding a Health Savings Account (HSA) if you have that option with a high deductible health plan.

If you’re self-employed or own a business, you might open a solo 401(k), SEP IRA or SIMPLE IRA to save for retirement instead. It’s important to understand the tax treatment of different retirement savings options.

For example, traditional 401(k) plans and traditional IRAs allow for tax-deductible contributions. Qualified distributions are taxed as ordinary income in retirement. Roth accounts don’t offer a tax deduction, but you can make withdrawals tax-free when you retire.

A Health Savings Account is not a retirement account, per se. It’s meant to be used to save money for medical expenses, but it can double as a source of retirement income since you can withdraw funds for any purpose after age 65 without a tax penalty. You’ll just owe regular income tax on withdrawals.

Investment Planning

Investment planning is related to retirement planning, but it can include different aspects of managing tax liability. For instance, say that you’re investing through a taxable brokerage account, which is subject to capital gains tax. Your financial advisor can offer different strategies for managing tax liability, which may include:

Holding investments longer than one year to take advantage of the more favorable long-term capital gains tax rate.
Choosing tax-efficient investments, such as exchange-traded funds (ETFs), which can trigger fewer turnover events than traditional mutual funds.
Harvesting tax losses to offset some or all of your capital gains for the year.

Your advisor may also be able to guide you on how to deduct expenses related to investment properties if you own one or more rental homes. They could also help with executing a 1031 exchange if you’re interested in swapping out one property for another to minimize capital gains tax.

Tax Deductions and Credits

Tax deductions reduce your taxable income, which can help to push you into a lower tax bracket for the year. There are numerous expenses you might be able to deduct, including:

Mortgage interest
State and local taxes
Charitable donations
Business expenses
Self-employment expenses
Medical expenses
Student loan interest

Tax credits, meanwhile, reduce what you owe in taxes on a dollar-for-dollar basis. For instance, if you owe $1,000 in taxes and qualify for a $1,000 tax credit, the credit can wipe out what you owe. Some credits are refundable which can increase the size of your tax refund for the year. A financial advisor can walk you through the various deductions and credits you might be eligible to take in order to reduce your tax liability.

Withdrawal Planning

As you approach retirement, it’s important to consider how you’ll withdraw the money that you’ve saved. Your advisor can discuss different strategies for withdrawing money from a 401(k), IRA or taxable brokerage account so that you’re not overpaying taxes or draining your retirement reserves too quickly.

Your advisor may also discuss ways to tax-friendly ways to create supplemental income in retirement, such as purchasing an annuity or taking out a reverse mortgage. An advisor can also help you figure out when to take Social Security benefits to maximize your payment amount and how to coordinate those benefits with other sources of income in retirement.

The Bottom Line

Knowing what happens to your tax liability with proper financial planning is important for creating a long-term strategy for growing wealth. Handing over more money than you need to in taxes doesn’t offer any tangible benefit and it can be problematic if it leaves you with less money to save and invest. Having a trusted financial advisor to work with can ensure that you’re meeting your tax obligations without shortchanging your goals.

Financial Planning Tips

Tax planning can seem complicated if you’re not well-versed in the Internal Revenue Code. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Robo advisors can offer a more affordable way to manage financial planning, as the fees may be lower than what traditional advisors charge. However, it’s important to know what you’re getting for the money. For example, some robo-advisors offer tax loss harvesting but not all of them do. Additionally, robo-advisors aren’t really equipped to offer one on one advice about tax planning or investing. Those are good reasons to consider working with a human advisor instead, even if it means paying a slightly higher fee.

Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.

Source: smartasset.com

Apache is functioning normally

June 6, 2023 by Brett Tams

By Jason Topp 24 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited May 14, 2012.

Oh what a great year for debate on Roth IRA’s and Roth IRA Conversions! Roth IRAs are a great tool for building up retirement savings, but some things have changed for conversions.

2010 has ushered in some new Roth IRA rules -here’s what you need to know about the 2010 Roth conversions.

I recently received a comment from a reader that I thought garnered a little more attention. Here’s what the reader asked:

My wife and I had traditional non-deductible IRAs and converted at the beginning of this year. We assume that the Roth conversions wouldn’t cause us any tax liability since our contributions to the traditional IRAs exceeded their values at the time of the conversion. Have you heard anything about the tax implications of Roth conversions from traditional non-deductible IRAs?

So what we know from the statement above is that they converted to Roth IRAs from Traditional, non-deductible IRAs. We also know that there were no gains in the account, meaning it was strictly contributions – and they’re wondering what their tax implications will be on this move.

This is a GREAT question!

What is a Traditional Non-Deductible IRA

Let’s define what a traditional, non-deductible IRA is so that we are all on the same page.

Generally speaking a traditional IRA allows money to be contributed pre-tax, which means that you get to take a deduction for it. It’s deductible off of your gross income. This also means that when you withdraw from your IRAs this money becomes taxable at that time!

So, for example, you put in $5,000 to a traditional IRA, you are allowed to subtract $5,000 from your income, which in turn gives you less reportable income to pay taxes on.

Of course the IRS has some funky little rules to spoil how much you can stash into traditional IRAs.

Basically, if you already participate in an employer-sponsored retirement plan – meaning you have a 401k, 403b or SEP IRA etc. – AND you make too much money then you get phased out of your “deductibility” of the IRA and the contributions then turn into non-deductible IRA contributions!

It’s as if you put after-tax money into the IRA.

What are the Income Limitations for Deductible IRAs

Let’s take a look at the rules for tax year 2009:

If you are a single filer and are covered by an employer-sponsored retirement plan you begin getting phased out of your deductible IRA contributions if you have an adjusted gross income (AGI) between $55,000 and $65,000.
If you’re married filing jointly, covered under an employer-sponsored retirement plan then you begin getting phased out between $89,000 and $109,000 AGI.

If you’re making more than this then your entire contribution to the Traditional IRA is non-deductible!

What are the Tax Implications of a Non-Deductible IRA to Roth IRA Conversion

Back to the question at hand – how will this affect me on my taxes?

So here’s a couple things to consider:

What is your basis (contributions to the IRA) and what is the earnings amount? In the reader’s case they didn’t have any gains to worry about. But if they did, they’d have to pay tax on the earnings portion.
If you had no other IRAs in place (including SEP, SIMPLE and Traditional) then you’re good to go – no taxes due!
If you did have other IRAs in place, then you may not be in as great a shape as you thought – you may owe Uncle Sam!

Here’s what I mean on the last two:

The rule with a Non-deductible IRA is that you MUST aggregate all your non-Roth IRAs together as one big account when doing a Roth conversion in order to determine the tax liability.

Here’s an example:

Let’s say you have two IRAs with a total value of $30,000. One is a traditional IRA that has a $15,000 balance and all of that is pre-tax.

The other is a non-deductible IRA that includes $15,000 of nondeductible, or after-tax, contributions and no earnings as in the reader’s case.

If you decide to convert all $30,000 of your IRA money, then $15,000 (the amount you contributed to the non-deductible IRA on an after-tax basis) would not be taxable since you’ve already paid the tax on that money.

But the remaining $15,000 would be taxable because Uncle Sam hasn’t got his piece of that pie yet (it’s pre-tax contributions plus earnings that have not been taxed yet)

Let’s say you only want to convert your non-deductible IRA funds since there are no gains and you’ve already paid tax on the contributions – what happens?

In theory, this is a great strategy, but as mentioned, you have to consider all non-Roth IRAs as one big pie.

The Uh-Oh

In the example above, your already-taxed nondeductible contributions of $15,000 account for 50% of your total, while the $15,000 of pre-tax deductible contributions and investment earnings represent the other 50% of your $30,000 IRA pie.

Whether you convert the entire $30,000 or just a slice of it, 50% is considered taxable income.

It doesn’t matter where you take that slice from (non-deductible or pre-tax) – each has the same ingredients of taxable and nontaxable money as the whole!

What You Need to Do

If you find yourself in this situation, you’ll need to fill out IRS form 8606 and wade through the instructions and the mire!

Source: biblemoneymatters.com