retirement

Beat These 5 Financial Challenges

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

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A number of signs indicate the U.S. economy is improving. They include soaring consumer confidence, highs for the stock market, and the low unemployment rate (most recently 4.5 percent).

At the same time, financial obstacles remain for many Americans. A new survey from the National Foundation for Credit Counseling underscores some of these ongoing challenges.

Common financial obstacles and how to overcome them

I picked some of the biggest challenges highlighted in the survey and added some advice on how to fight back if you’re going through them.

Rising credit card debt

Thirty-nine percent of respondents carry credit card debt from month to month, compared with 35 percent last year. Some 16 percent of adults say they carry $2,500 or more in credit card debt every month.

What you should do: Pay off as much as you can now. Benchmark interest rates are on the rise, and the Federal Reserve has indicated that rates are likely heading higher this year. So credit card debt is going to get more expensive. Consider getting a balance transfer card to reduce the interest you’re paying.

Student loan strains

Among respondents, 11 percent wouldn’t recommend student loans to finance college education, the same percentage as last year. Those who said their student loan was a good investment rose a bit to 9 percent, compared with just 6 percent over the previous two years.

What you should do: If you’re saddled with student debt, make larger payments if you can afford it. Also, have a percentage of your income automatically directed toward a college repayment fund so you won’t be tempted to use the money on something else. Check out this calculator that shows you how long it will take you to pay off your student loans based on varying factors.

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People saving less

Some 54 percent said they are saving the same as last year, down 4 percentage points from last year. The percentage of those saving more is unchanged at 26 percent. Meanwhile, 68 percent say non-retirement saving has decreased slightly over the past year.

What you should do: First, monitor your spending and make a budget. Then, make sure you’re getting the most from your accounts. Compare rates on savings accounts and CDs to make sure you’re getting a competitive return. Also, set up a direct deposit to transfer funds into your savings account.

Not saving for retirement

Among respondents, 27 percent aren’t saving any portion of household income for retirement. That’s little changed from last year. Asked about what areas of their finances worry them most, the top response was retiring without having enough money set aside.

What you should do: If your employer offers a 401(k) and matches a percentage of your contributions, make sure you’re taking advantage of the full match. Look over your current investments to make sure you’re not being charged high fees. Once a year, increase the amount you contribute by 1 or 2 percentage points at a time.

Need professional advice

A whopping 80 percent of U.S. adults say they could benefit from professional advice and answers to everyday financial questions.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Retirement investing through the decades

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

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Investing to grow your retirement savings is a long-term project. The earlier you begin, the better, thanks to compounding interest.

You don’t have to worry about saving a lot at first. It’s all about forming a plan you can stick to.

Here are suggestions for retirement planning through the decades.

Your 20s: Open a 401(k) and IRA

You will likely land your first job in your 20s and can begin saving money for retirement. But before doing so, make sure you have enough cash to pay for three to six months’ worth of living expenses, in case an emergency arises. If you set up a retirement account and then withdraw from it to pay for emergency expenses, you may be subject to taxes and a penalty payment.

Once you have emergency savings, start funding a 401(k) if your employer offers one, especially if the company matches some of your contributions. If you turn down the option to contribute to a 401(k) plan that matches, you’re essentially giving away free money. In 2017, you can contribute up to $18,000 in a 401(k).

You also can open an individual retirement account, or IRA. In 2017, you can contribute up to $5,500.

If you can’t save enough to maintain both a 401(k) and an IRA, go for the 401(k) because contributions are automatic, pretax and subject to matching.

Your 30s: Consider a Roth, adjust asset mix

If you open an IRA in your 20s or 30s, you’ll want to consider a Roth IRA. Unlike a regular IRA, you don’t receive a tax deduction for contributions to a Roth. But when you withdraw money from a Roth IRA during retirement, it’s all tax-free. The money you withdraw from a regular IRA is taxed as regular income.

So if your tax rate is likely to be higher when you withdraw money from your IRA than it is now, you’re better off with a Roth IRA.

When it comes to allocating your retirement investments, try to put at least 60 percent in stocks during your 20s and 30s. But it all boils down to your risk tolerance. If you are unwilling to stomach losses, don’t put everything in stocks. The worst thing you can do is buy stocks and then sell them for a big loss.

Your 40s: Stay focused on the long run

Many people purchase homes in their 30s and 40s. It’s important to remember that your house is not part of your retirement plan, says Mick Heyman, an independent financial adviser in San Diego.

“I haven’t seen too many times that somebody buys a great home, sells it at 60 and then lives off the profits,” he says. So don’t spend so much money on a home that you can’t afford to save for your retirement as well.

You also must be realistic in providing for your children. Don’t spend so excessively on your kids that you neglect your retirement savings goals. That may even mean putting retirement plans ahead of your children’s college. Tuition payments can come from many sources, but retirement funds will have to come largely from the parents.

Your 50s: Capitalize on catch-ups

The 50s are the peak earning years for most people, so it’s even more critical to save. The government gives you some assistance, allowing increased contributions to IRAs and 401(k)s through “catch-up provisions.”

For IRAs, people 50 and older can contribute an extra $1,000 this year — $6,500 in total.

For 401(k) plans, participants 50 and older can put in an extra $6,000 — $24,000 in total.

If you have children who are now out of the house, you might have enough money to finance those catch-up payments.

Your 50s are a good time to opt for more safety in your asset allocation, experts say.

“Somewhere in your 40s and 50s, you want to transfer to more conservative stocks, and make sure you aren’t all in stocks,” Heyman says. “Start having 20 to 30 percent in bonds.” He also recommends orienting your stock holdings toward dividend-paying blue chips. They offer safety and income payments that you’ll appreciate during retirement.

Your 60s: Plan an income strategy

This is the decade in which you may well retire, which means you’ll begin withdrawing from your retirement funds.

The traditional rule of thumb is that you can cash out about 4 percent of your portfolio in each year of retirement. But with low interest rates limiting the amount of income your portfolio will generate, 3 percent may be more appropriate now.

Ideally, you should have two years’ worth of living expenses in cash to avoid having to dump your investments when markets are weak.

Adjust your asset allocation so that bonds account for a larger part of your portfolio, given your need for safety and income.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

7 Milestones In Life That Trigger Taxes: Birth, Marriage, Work, Homeownership and More

 

 

 

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

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You were blissfully unaware of it, but taxes became a part of your life on the day you were born.

From that beginning as a spanking-new tax break for Mom and Dad, taxes have had an important role in all your major life events, from getting a job, saying “I do,” buying and selling homes, having kids of your own and even retiring.

In some cases, the involvement of the IRS is not such a good thing.

But in many ways, the tax code can be your best friend. You just need to know how it applies to your personal circumstances so you can take advantage of it. Read on to learn more about tax breaks for life’s big events.

Getting Your First Job

Uncle Sam gets a portion of your paycheck via payroll taxes. You do, however, have a bit of a say in how much comes out of your pay by adjusting your withholding.

If you have too much withheld, you’ll get a refund when you file. That’s not necessarily bad, but wouldn’t you rather have your own money year-round instead of giving the IRS an interest-free loan?

On the other hand, if you don’t have enough taken out, you could face a major tax bill, and possible underwithholding penalties, at filing time. Ask your boss for a new Form W-4 so you can run the numbers and adjust your withholding. You can change your withholding amount as often as you need to get your tax amount just right.

Your job likely offers several tax breaks. If your employer provides health care coverage, your medical insurance is a tax-free benefit to you. You’ll find out how much that’s worth on your W-2 earnings statement.

A flexible spending account, or FSA, also might be part of your job benefits. Here you can save pretax dollars to pay for medical care not covered by insurance.

You also want to take advantage of your workplace’s tax-deferred 401(k) retirement plan.

And if you move to take a job, even your first one, you can write off many of your relocation costs.

Getting Married

Uncle Sam probably wasn’t a guest at your wedding, but he becomes a big part of your life when you are a married taxpayer.

Most couples filed jointly because it generally produces the best tax result.

If both partners work, coordination of employer fringe benefits after marriage is key, says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.

Reassess your individual retirement accounts. Your new combined income could affect your retirement contributions. Income limits apply to tax-free Roth accounts and also to how much of a traditional IRA contribution you can deduct if you or your spouse put money into a workplace retirement plan.

Marriage also is one of the changes in family circumstances that allows you to revisit your tax-favored FSA. Newlyweds also should reevaluate how much each has withheld from their paychecks.

And what about your once-in-a-lifetime honeymoon? The tax code’s annual gift exclusion amount for 2017 is $14,000, the same as it was for 2016. It’s usually adjusted annually for inflation.

That means both a well-to-do mom and dad could give each newlywed $28,000 or a combined total of $56,000 to the wedded couple. That definitely would pay for an extravagant post-ceremony getaway.

Having Children

Congratulations on your new baby. Let Uncle Sam help cover some of your growing family’s costs.

A dependent youngster is an added exemption. Kids also allow parents to claim the child-tax credit as long as the youngster was 16 at the end of the tax year. Large families might be able to get money back from the IRS via the refundable additional child-tax credit.

If your family grew via an adoption, there’s a tax credit to cover some of the many costs of that process.

Working parents can use the child- and dependent-care credit to pay for some of the costs of caring for their kids while they are on the job.

And the tax code also offers several ways to save and pay for higher education costs, including 529 college savings plans, the Coverdell Education Savings Account and the American opportunity and lifetime learning tax credits.

Starting a Business

Once you decide it’s time to break out of the corporate cubicle and start a new business, the tax code can help.

Filing is relatively easy for sole proprietors. They report their income as part of their annual individual tax filing by attaching Schedule C to Form 1040. Schedule C also offers many ways for individual entrepreneurs to write off many of their business expenses.

Among the deductible small-business costs are home office expenses. Business use of a vehicle also is deductible, as are health insurance premiums and contributions to self-employed retirement plans. New businesses also are allowed to deduct thousands in certain startup costs.

If you have kids, putting them to work in your sole proprietorship could be a tax-smart move. Depending on how much you pay them, they might not owe income taxes and you can deduct the salary as a business expense.

But starting a business is not all about tax breaks. Sole proprietors also must pay self-employment taxes. These are the equivalent of the payroll taxes collected from wage-earning employees. As both the employer and employee, a sole proprietor has to pay the boss and worker components of Social Security and Medicare taxes.

And running your own business usually means you must file more tax forms, including estimated tax payments four times a year.

Buying a Home

Your home is probably your biggest investment. Homeownership also provides many tax breaks.

Interest paid on a primary residence mortgage up to $1 million is deductible as an itemized expense. If you take out a home equity loan or line of credit, interest on those loans up to $100,000 also is deductible. Even the interest on a second home is tax-deductible.

Property tax you pay on your main house — and any other residences you own — also is deductible.

The tax benefit of a home is even better when you sell it. Up to $250,000 in sales gain ($500,000 for married joint filers) on your home is tax-free, as long as you owned the property for two years and lived in it for two of the five years before the sale.

Many home improvements, such as structural additions, kitchen modernization and landscaping, can increase the basis in your home. This is essentially your investment in the home. A larger basis means less profit that might be taxable.

And some home upgrades, such as installing solar energy systems, also will get you an immediate tax credit to help offset the high cost of this type of improvement.

Dealing with Divorce

As with marriage, your filing status is determined on the last day of the tax year. If your divorce is final on Dec. 31, then you are considered unmarried for the full year.

One of the stickiest divorce issues is child custody. The parent who has physical custody of the children for most of the year usually gets to claim them as dependents. That means that parent gets the exemption, child-tax credit and child-care tax credit savings.

One spouse typically is granted sole ownership of the family home. This could, however, pose a problem for the solo owner. When the lone ex sells the property, the amount of profit exempt from capital gains is just $250,000 versus the $500,000 that married filing jointly homeowners can exclude. Because of that, some couples sell the house before they divorce and split the tax-free profits.

Similarly, take into account the cash the recipient partner will net after taxes when dividing other marital assets.

And note that alimony has tax implications for both ex-spouses. It is taxable income to the recipient and can be deducted by the paying ex. Child support, however, offers no tax breaks to the paying ex, as it is not deductible. However, to the recipient, it isn’t taxable.

Retiring

Your golden years will be more enjoyable if you take advantage of the many tax breaks afforded by retirement plans.

A traditional IRA contribution could produce a tax deduction when you file your tax return. Remember, though, that you’ll have to pay taxes on this account when you start taking out money in retirement.

With a Roth IRA, you put in already-taxed money, but that means eventual distributions from a Roth are tax-free. The biggest drawback to a Roth is that you can’t open or contribute to a Roth if you make a lot of money. However, regardless of your income, you can convert a traditional IRA to a Roth.

Workplace retirement plans, usually known as 401(k)s or Roth 401(k)s, offer similar retirement saving options, but with a nice bonus. Many employers match some of your plan contributions, which helps your retirement savings grow more quickly.

Social Security benefits generally are tax-free as long as you don’t have a lot of other income.

And if you do have to file a tax return when you’re older, you can claim a larger standard deduction amount simply because you’re age 65 or older.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.