Thereâs no doubt about it: Thinking about money can be a bit nerve-wracking. In fact, one recent study found that 90% of Americans say money impacts their stress level. If youâve ever swiped your debit card and seen âtransaction deniedâ or looked at your credit cardâs interest rate, you can probably relate to that. But […]
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For many people, the goal of investing in assets like stocks or real estate is to see the price of the investment go up. The objective is to buy at a relatively low price and hope the asset’s value goes up over time. Though it may be easier said than done, this strategy — called […]
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When the recipient of a payment wants reassurance that a check is valid and will not bounce â especially in large transactions like a car purchase or a down payment on a house â a cashierâs check can be a good solution. In fact, in some financial transactions, a cashierâs check is required. But if […]
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If you think itâs never too early to start saving and like the idea of kids getting real world money experience at a young age, you may be wondering how old you have to be to open a bank account. A child generally can open a bank account at any age â as long as […]
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Medical insurance jargon can be confusing, especially all the acronyms. We break down what an HSA is and how it can help you save on medical costs.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Taxes are on the minds of many this time of year with the filing deadline looming. But too often, people think about taxes only on a one-year-at-a-time basis, forgetting or putting off the need to adjust their strategy for future years â most importantly, their retirement.
As you prepare for your non-working years, itâs important to consider the burden taxes can pose in retirement. Being proactive and developing a tax-efficient strategy is especially important for those who will retire soon. If you have a tax-deferred retirement account (IRA, 401(k), 403(b), SEP, etc.), you unfortunately have an account that has one of the same features as a variable-rate mortgage. At any point, the IRS can change the rate (here, though, it is the tax rate rather than the interest rate).
Some financial professionals think that given our growing national debt, tax rates will likely go up at some point in the next few years â rising from the historically low rates we have now. And remember that when you withdraw money from one of your tax-deferred retirement accounts, whether because you need the money or you were forced to due to required minimum distributions, you must pay taxes on every dollar.
Do you know what your tax rate will be one, five or 10 years from now? Perhaps you want to withdraw as little as possible and leave it to your children. Do you know what taxes they will have to pay on those funds 10, 20 or 30 years from now? And the future tax burden your spouse could face after your passing is something you must also consider.
The good news is that you can take steps to preserve some of your money in tax-free environments, thereby reducing your debt to the IRS. First, consider the three âtax bucketsâ:
Itâs more common to have most of your money in the tax-deferred and taxable buckets. If you are interested in being proactive for the long term, here are two strategies worth considering to put more in your tax-free bucket:
Some conditions must be met to contribute to a Roth IRA, such as earned income, income limits and contribution limits, so not everyone can contribute to a Roth. However, converting your tax-deferred money to a Roth IRA is possible for everyone. A Roth conversion must keep the big picture in mind, but if we look at the long-term savings of a Roth conversion, it can be significant.
Hereâs an example of a married couple, Greg and Tina, both aged 65 with an annual income of $75,000, whose goal is to convert $200,000 of a traditional IRA (tax-deferred) to a Roth IRA (tax-free). The tax impact on them from a traditional IRA vs. a Roth IRA is based on these assumptions: living through age 90, a 25% effective tax rate (combined federal and state) on RMDs and taxes paid on death, a 15% capital gains tax on reinvested RMDs, and a 5% average rate of return over the period. In a $200,000 conversion to a Roth IRA, they would pay $46,000 in taxes â in the year of their conversion â under the current tax code. If Greg and Tina do nothing (do not convert to a Roth IRA) and instead simply draw their required minimum distributions beginning at age 72 until they have both passed away (surviving spouse passes at age 95), they would pay $62,692 over that period of time.
The bigger tax savings are down the road. For a Roth IRA, their taxes on reinvested funds are $0, and the taxes on the value at death are $0. Total taxes paid for the Roth IRA: the $46,000 paid for the one-year conversion.
By contrast, capital gains taxes on reinvested RMDs for the traditional IRA are $26,796. Taxes on value at death for the traditional IRA: $41,665. Total taxes paid if they had stuck with the traditional IRA: $131,153.
Note: A Roth conversion is a taxable event and may have several tax-related consequences. Be sure to consult with a qualified tax adviser before making any decisions regarding your IRA. This is a hypothetical example provided for illustrative purposes only; it does not represent a real-life scenario and should not be construed as advice designed to meet the particular needs of an individualâs situation.
High-income earners are not the only group of investors who turn to life insurance. Pre-retirees and retirees are interested in this option because, in addition to the death benefit and potential for tax-free income, if the contract includes the additional benefits of long-term care, they can kill two birds with one stone.
The death benefit is also tax-free. If you are looking for the following features, a permanent life insurance policy might be a consideration for you:
Keep in mind, however, that because this is life insurance, there are fees and charges, including surrender penalties for early withdrawals. You will need to qualify for the policy medically and perhaps financially and fund it appropriately for it to remain in force.
If you want the IRS to take the smallest bite possible out of your money, consider these strategies, which allow you to convert your tax-deferred money into tax-free money. Being proactive is the key to enjoying your retirement more on your terms.
Youâve probably heard of health savings accounts, or HSAs. You can use these accounts to pay medical expenses if you have a specific type of health plan with high out-of-pocket costs. But with sweet tax advantages, HSAs can also be a smart way to save for future medical expenses in retirement. Think of it like [â¦]
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
For retirees on a fixed income, inflation can have a significant influence on their ability to maintain their budget. Thatâs because as inflation rises over time, that fixed income will lose value. That could mean that retirees need to scale back their spending or even make drastic changes to ensure that they donât run out […]
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