Seven Common Retirement Account Mistakes

Retirement Mistakes

It is all too easy to make a mistake that can cost you plenty if you do not actively manage your retirement assets. Here are some common retirement account mistakes that can easily be avoided.

 

 

 

 

 

 

Bullet Point Borrowing money, then leaving your job. Those with employer-provided retirement accounts, such as 401(k)s, can often borrow money from their accounts. Unfortunately if you leave your job, this money must be repaid immediately. If it’s not repaid, your loan will be considered a withdrawal of funds, creating a hefty tax bill and early withdrawal penalty.
Bullet Point Incorrect rollover of funds. If you plan on moving funds from one retirement account to another, do not have the withdrawal check issued to you. If the funds are not correctly redeposited, your transfer could be deemed a taxable event.

Better: Create a trustee-to-trustee transfer. By having the funds go directly from one retirement account to another, you eliminate the risk of the IRS assuming you made a withdrawal.

Bullet Point Waiting until 70½ before taking money out. A key concept in retirement planning is to make your retirement accounts as tax efficient as possible. This often means taking money out of an account before you actually need it. When you reach age 70½ or older most retirement accounts require you to take a minimum distribution based on a formula.

Better: Review your tax situation each year. It may make sense to take a withdrawal out of a retirement account now in order to pay a lower tax compared with the tax on a required distribution when you are older.

Bullet Point Not reviewing beneficiaries. The beneficiaries of most retirement accounts have priority over what is stated in your will. This can have unintended consequences.Better: Review your retirement account beneficiaries each year. Note alternative beneficiaries if allowed within the account.
Bullet Point Not reviewing your investment mix. Many make their retirement investment decisions when they set up their account and then leave it alone. But as you age, your investment mix should change. Your account can also become out of balance as funds perform at different rates.Better: Review your funds annually, rebalance your funds and replace poorly performing funds as needed. Your employer or trustee appointed advisors can help you make investment decisions that meet your needs.
Bullet Point Not maximizing your employer contributions. Most employer-provided retirement accounts include an employer-provided contribution. Often this is a matching contribution where your employer will match 50% to 100% of your contribution up to a percent of your pay. Not taking advantage of this free money is one of the worst mistakes you can make.
Bullet Point Not participating. And the worst retirement account mistake? Not participating. Unless your retirement plan is to win the lottery, you will need income during your retirement years. You are never too young or old to start saving for a retirement free from financial worry.

The Right Ingredients to Improve Your Credit Score

Credit Score Ingredients

Your credit score is important. It dictates how easy it is to obtain a loan for a car, house, or business acquisition. Your score is expressed as a number that ranges between 300 and 850 points. The closer you are to 850 points, the more likely you are to receive a loan and the less you’ll pay in interest. So, how is your credit score calculated and how can you improve it?

 

 

Credit score ingredients

1 Payment history, 35 percent. The most important element of your credit score is your payment history, or your record of paying your bills on time. Lenders place such a premium on this element that even one payment made later than 30 days after the due date can have a drastic effect. It can drop your score by as much as 100 points, according to FICO, the company that sets the credit score standard.
1 Credit card debt usage, 30 percent. Lenders like to see that you aren’t getting close to using your maximum credit card limit each month. For the best score, you should keep your monthly debt between 10 percent and 30 percent of your maximum limit. The lower the better. A great place to start is to understand your spending limits on your credit cards and keeping any balance on your cards below the 30 percent threshold.
1 Credit age, 15 percent. You get a better credit score depending on how far back your credit goes. The age of your credit is the average of all your accounts, so if you open a lot of new accounts, this will shorten your credit age and start to lower your credit score.
1 Account mix, 10 percent. Lenders like to see that you have a track record of paying a variety of different kinds of debts, such as credit cards, mortgages, car, and business or education loans.
1 Credit inquiries, 10 percent. Each time you apply for a new credit card, a new loan, or ask for a substantial increase in your credit limits you generate a “hard inquiry” on your credit report. It’s a sign that lenders are checking into your credit history to determine your risk. While that’s not necessarily a bad thing, trying to open too many new accounts in a short period of time is seen as a red flag by lenders.

 Key ideas to improve your credit

Bullet Point Pay your bills on time. Ask your credit card providers or lenders to set all your due dates on the same day, and then set a reminder in your calendar. Consider using auto-pay for more important bills like credit cards and mortgage payments.
Bullet Point Manage your credit card debt limits. Ask your credit issuers to increase your card line limit. You can also limit the amount of credit card debt you accumulate by paying your bill in full each month, stop using a card but not closing the account, or switching to cash as you approach your line limits.
Bullet Point Build a credit history. The sooner you get started in establishing a credit history, the sooner you’ll establish a track record of payments that give lenders confidence in your ability to repay debt.
Bullet Point Create variety. Manage your debt, but understand that making student loan payments on time, paying off credit card debts and other loans can present you as a quality credit risk to prospective lenders.
Bullet Point Manage your credit hits. Try to limit the number of new accounts you open over a short period of time. Each hard inquiry will only impact your credit score by a few points, but each one stays on your credit report for two years.
Bullet Point Know your number. Last, but not least, know your credit score. Sometimes a low score can be the result of an error in your credit history or a recent identity theft problem. You have the right to receive your credit report free once per year from each of the major credit reporting agencies. Here is the link: AnnualCreditReport.com

 

 

Inherited Property: A Matter of Value

Estate

Avoid this potential tax headache

If you are expecting to inherit property when friends or relatives pass away, know that their generosity can come with tax consequences. It’s important to understand how the value of your inheritance is determined in order to avoid a potential tax surprise in the future.

Estate tax basics

When a friend or relative dies and leaves behind a will, someone will be named executor of their estate. The term “estate” means the total amount of the assets and liabilities the deceased person leaves behind, and the “executor” is the person named to handle the the affairs of the estate. It also includes managing the distribution of remaining assets to “beneficiaries,” which is another word for the people who inherit the assets.

The executor has the responsibility to calculate the value of the assets, generally on or around the date of death. This is called the “stepped-up basis.” If the total value of the estate is worth less than $5.49 million, the estate pays no federal tax. If it’s more than that amount, the IRS’s piece of the pie scales up to a whopping 40 percent. Thirteen states and the District Columbia also collect state estate taxes of as much as 20 percent.

The conflict over value

Generally speaking, executors would rather have the estimated value of an estate’s total property fall below estate-tax thresholds. But as a beneficiary receiving an inheritance, it’s in your interest to have a higher estimate of value. That way you may avoid higher capital gains tax if you sell the property.

A high estate valuation helps you as a beneficiary because you only pay tax on the increase in value from the “stepped-up basis.” So, if your inherited property was valued at $200,000 and you later sell it for $300,000, you would pay taxes on $100,000. But if the same property was valued at $300,000, you would potentially owe no tax.

A matter of value

In valuing a piece of property, an executor will compare it to similar properties that have recently sold. Ideally there is a qualified appraisal by an expert to determine the “fair market value”.

If you disagree with the way an executor has valued property you are inheriting, it may be a good idea to have your own appraisal done. With your appraisal in hand, reach out to the executor and make your case for the higher valuation based on your appraisal. Keep in mind that you don’t want an evaluation that is either too low or too high — you want a reasonable fair market value of the assets. If you don’t talk to the executor and you end up using a different valuation in reporting to the IRS, you could be facing a big tax headache.

If you’re able to talk to the executor and agree on a valuation, consider asking for a Form 8971 Schedule A. This form itemizes the valuation of property and is now often required by the IRS for estates worth more than $5.49 million. However it can also be used to provide you with documentation showing that you and an executor have reached an agreement on the value of a specific piece of inherited property.

IRS Announces Annual Tax Scams

Tax ScamsEach year the IRS announces a list of the “Dirty Dozen Tax Scams” its agents encounter most frequently. Highlighted here are seven of the most common.

Bullet Point Creating fake income. It has come to the attention of the IRS that some taxpayers are creating false income for the sole purpose of obtaining tax credits like the Earned Income Tax Credit. This false income can be in the form of a fake 1099-MISC or fictitious self-employment income. The penalties for this type of fraud can be severe.
Bullet Point Falsely padding deductions. Creating deductions and inflating dollar amounts of legitimate deductions is now on the IRS Dirty Dozen list. While it may seem a little thing to stretch the amounts, the increased reporting received by the IRS makes it easier for them to see these inflated deductions.
 Bullet Point Excessive business credits. This scam focuses on two commonly misused business credits: the fuel credit and the research credit. The fuel credit is usually only available for off-street vehicle use (typically for farming). While the research credit may seem straightforward, there are stringent qualifications and reporting requirements. Prior to using either of these credits, you should ask for a review of your situation.
Bullet Point Fake charities. After major disasters, many charitable givers are scammed into making donations to fake charities. This makes donations to them nondeductible. To protect against this, prior to donating funds make sure the charity is both legitimate and deemed a qualified charity by the IRS. Here is a link to the IRS tool to confirm charitable organizations. IRS Exempt Organizations List Check
Bullet Point Identity Theft. Identity theft tops the Dirty Dozen list every year. Thankfully, the IRS takes precautionary measures to curtail this out-of-control problem. In addition to limiting the number of direct deposits it will make to any single account, the IRS is working with states and tax preparation software vendors to put more controls in place. This includes some states requiring drivers license numbers on their tax forms, delays in early processing of tax refunds, internal tracking within software programs, and continual checking for heavy filing activity.
Bullet Point Phone scams. Phone calls from thieves representing themselves as IRS agents continue to get more sophisticated. The caller ID may show as coming from the IRS and the scam may involve numerous phone calls instead of a single contact. These thieves often have some of your personal information and try to intimidate their victims with threats of jail time, deportation or license revocation. Remember, never give information over the phone to someone claiming to be from the IRS.
Bullet Point Phishing. This recurring scam involves receiving fake emails and websites that look like the real deal. The IRS will not send you billing information or refund information via email. Do not click on any email link received from the IRS unless you requested it. Remember the IRS does not initiate contact through emails.

Collectibles and the Tax Collector

Collectible Coins

It typically takes a great deal of personal interest and expertise in a given field — whether it’s rare art, coins or baseball cards — to judge a treasure from a trinket. For those of you who have been bitten by the collector’s bug, here are some tax considerations.

 

Collectibles defined

According to the IRS: “Collectibles include works of art, rugs, antiques, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible properties.” 1 What makes something a collectible is that it carries additional value based on its rarity and its market demand. Essentially, the opinion of other collectors and experts, based on what they are willing to pay for your collection, determines its value.

For example, a typical one-ounce gold coin is worth about $1,200 based upon the value of the metal and would not be considered a collectible by the IRS. However, a rare antique double eagle gold coin produced in the 19th century could be worth $20,000 to a collector, even though it is made of exactly the same amount of gold as the non-rare coin.

Collectibles special tax rate

When collectibles are sold, they become taxable at a maximum tax rate of 28 percent. The tax applies to profit on the sale of your collectibles.

That tax rate is considerably higher than the average capital gains tax of 15 percent that most people pay for non-collectible investments such as stocks and bonds (the tax range for long-term capital gains is from 0 to 20 percent). The exception to this rule is that if you’ve held your collection less than a year before you sell it, your capital gain will be taxed as regular income.

It’s all about the basis

In order to calculate what you owe to the IRS if you sell your collectibles, start with your basis. Your basis typically equals the amount you paid for your collectibles, plus any auction or broker fees incurred during your purchase. If you spent money to refurbish, restore or maintain collectibles while you owned them, you can also add that to your basis.

Then, subtract your basis from the sale price of your collectibles; the amount left over is what is taxed. Here’s an example:

Ima Dahl decides to sell an 1898 German Bisque porcelain doll from her collection. She’s owned the doll for ten years and originally paid $700 for it. She also paid $150 two years ago to repair its cracked finish. She receives $1,800 by selling it at an online auction and spends $100 paying her auction fees and shipping to the new owner. Since she owned the doll for more than one year, her long-term capital gain is $850 and her potential maximum tax is $238. The calculation: $1,800 net sales price, minus the $700 basis, minus $150 for repairs, minus $100 selling expense multiplied by 28%.

Some collectible hints

Bullet Point Know the market value. If you inherit a collectible you will need to know the value of the object on the date you obtain it. This will usually become your basis when you sell it.
Bullet Point Investment or personal use. If your collectible is an investment you can usually take a loss on the sale of the collectible. Unfortunately, if the IRS deems the collectible has an element of personal use, you may not deduct the loss. An example of personal use may be the hanging of a painting on your wall. Being careful how you sell your collectible can also make a difference in managing your potential tax liability.
Bullet Point Collectibles tax rate good or bad. The 28 percent capital gain tax on collectibles is the maximum tax rate. For example, if you are in the 15 percent income tax range, your collectible gain is taxed at that rate. If your income tax bracket is higher than 28 percent, the collectibles tax rate is capped at 28 percent, resulting in a potentially lower tax rate versus ordinary income taxes.

As you can imagine, the taxes on buying and selling collectibles can be complex. If you are considering selling a potentially valuable item, ask for assistance.

Use Your Tax Refund Wisely

Roth BasicsThree of every four Americans got a refund check last year and the average amount was $2,777, according to IRS statistics. Because the amount of a refund is often uncertain, we may be tempted to spend it without too much planning. One way to counteract this natural tendency is to come up with a plan beforehand to spend your refund purposefully. Here are some ideas:

4 Pay off debt. If you have debt other than your home mortgage, a great spending priority can be to reduce or eliminate it. The longer you hold debt, the more the cumulative interest burden weighs on your future plans. You have to work harder for longer just to counteract the effect of the debt on your financial health. Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden down to a manageable level.
2 Save for retirement. Saving for retirement works like debt, but in reverse. The longer you set aside money for retirement, the more time you give the power of compound earnings to work for you. This money can even continue working for you long after you retire. Consider depositing some or all of your refund check into a Traditional or Roth IRA. You can contribute a total of $5,500 to an IRA every year, or $6,500 if you’re 50 years old or older.
3 Save for a home. Home ownership is a source of wealth and stability for many Americans. If you don’t own a home yet, consider building up a down payment fund using some of your refund. If you already own a home, consider using your refund to start paying your mortgage off early.
4 Invest in yourself. Sometimes the best investment isn’t financial, but personal. If there’s a course of study or conference that would improve your skills or knowledge, that could be a wise use of your money in the long run.
5 Give some of it away. Helping people, and being able to deduct gifts and charity from your next tax return, isn’t the only benefit of giving to a good cause. Research shows that it makes us feel good on a neurological level. In fact, donating money activates our brains’ pleasure centers more than receiving the equivalent amount.1

If a refund is in your future, start planning now on how it can best help your financial situation.

Overtime Rules Go Into Overtime

Time Clock

The fate of a Labor Department rule extending mandatory overtime pay to workers by doubling the eligible salary cap is uncertain under the new presidential administration.

The rule introduced by the Labor Department under the direction of former President Barack Obama increases the salary cap for workers eligible to receive mandatory overtime to $47,476. It extends mandatory overtime, or time-and-a-half pay, to workers primarily in managerial or administrative roles in the retail, restaurant, and nonprofit industries.

Opponents of the rule won a court injunction blocking it in November 2016. The case may be abandoned altogether depending on the priorities set by President Donald Trump’s appointee to lead the Labor Department. Andrew Puzder, chief executive of fast food corporation CKE Restaurants Holdings Inc. (owner of Hardee’s and Carl’s Jr.) is undergoing Senate confirmation for the role. Until the case is resolved, the previous salary cap of $23,660 remains in place.

 

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Reminder: It is Tax Scam Season Too

hidden person

Imagine you receive a call from an IRS agent who says you owe back taxes and threatens to arrest you if you don’t immediately make a payment over the phone.

Thousands of Americans faced this situation in 2016, though the people on the other end of their phone lines weren’t actually from the IRS. They were scam artists calling across the world from Mumbai, India. Their aggressive intimidation of U.S. taxpayers brought in $150,000 a day until police cracked down on their call center.

Amazingly, con artists impersonating IRS agents were involved in a quarter of all the consumer fraud incidents reported to the Better Business Bureau last year, making it by far the most common financial scam. With the new tax-filing season underway, now is the time to be especially vigilant.

Top scams of 2016 graphic

The threatening approach used in Mumbai is just one variety of IRS scam. Another involved sending emails from fake IRS addresses telling taxpayers that due to a mistake they were owed larger refunds. According to the email, all they had to do was provide their bank information and prepay the tax due on the larger refund. Once they made the prepayment, both the scammer and their supposed refund disappeared.

See through any IRS scam

By following a few guidelines you can see through any IRS scam:

Bullet Point Digital communication is a big no. The IRS will never initiate contact with you via email, text message or social media, nor will they request personal or financial information over those channels. If you do get an email communication purporting to be from the IRS don’t click on any links or open any attachments. Instead, forward the email to phishing@irs.gov.
Bullet Point Mail first. The first contact from the real IRS will be through the mail. If you get a letter from the IRS that is unexpected or suspicious, it should have a form or notice number searchable on the IRS website, www.irs.gov. Compare what you find there with what you received. If it doesn’t look right, you can call the IRS help desk at 1-800-829-1040 to question it.
Bullet Point  Never pay by phone. A legitimate IRS agent will never make a call to demand immediate payment of a bill or ask you to provide your debit or credit card information over the phone. If you are suspicious, ask for the employee’s name, badge number and phone number. A real IRS agent won’t hesitate to provide this information. You can then politely end the call and dial the IRS at 1-800-366-4484 to confirm the person’s identity.

 

When Converting to a Roth Makes Sense

Roth Basics

Virtually anyone with a qualified retirement savings account can convert funds into a Roth IRA. A Roth is different from other retirement accounts in that contributions come from after-tax dollars, while earnings are tax-free. The question for taxpayers with funds in tax-deferred Traditional IRAs, SEP-IRAs, 401(k)s, and 403(b)s is whether converting them into a Roth is worth it.

Roth Basics…

 

 

Major benefits of a Roth IRA:

Thumbs Up Earnings are free from federal tax. This can be of tremendous benefit if you are in a high tax bracket during retirement.
Thumbs Up Unlike Traditional IRAs, you can keep contributing to a Roth after age 70½.
Thumbs Up Unlike Traditional IRAs, there are no minimum required distribution rules.

Downsides of a Roth IRA:

Thumbs Down Because initial contributions are made with after-tax funds, you must pay income tax on the amounts converted from other retirement funds.
Thumbs Down If the tax paid during the conversion is taken from your retirement funds, you could be subject to a 10% early withdrawal penalty.

Things to consider

Prior to making the decision to convert funds into a Roth IRA, consider the following:

Arrow You should have enough money outside of your retirement account to pay the tax on the conversion.
Arrow A Roth makes the most sense if you think you will face higher tax rates when you retire.
Arrow A Roth conversion will increase your reported annual income by the amount converted during the year. If you aren’t careful, this could disqualify you for important tax benefits, such as dependent child and college tuition tax credits.
Arrow A Roth needs time to build tax-free earnings. The more time you have before retirement, the more a Roth makes sense.

It is important to understand your options, so remember to ask for assistance prior to making a Roth conversion.

2017 Standard Mileage Rates

The IRS recently announced mileage rates to be used for travel in 2017. The business mileage rate decreases by 0.5 cents while medical and moving mileage rates are lowered by 2 cents. Charitable mileage rates are unchanged.

2017 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 53.5¢
Medical/Moving 17.0¢
Charitable Work 14.0¢
Mileage Rates

Here are the 2016 rates for your reference as well.

2016 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 54.0¢
Medical/Moving 19.0¢
Charitable Work 14.0¢
Mileage Rates

Remember to properly document your mileage to receive full credit for your miles driven.