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401(K) Retirement Plan Explained

admin — Tue, 07 Jun 2011 23:35:46 +0000

Well, ready or not, here we come!

The 401(k) plan makes it easy and convenient for you to save money for retirement. Once you enroll, your contributions are automatically deducted from your paycheck before you even get to see it. This forces a strict savings discipline on you usually an absolute necessity if you’re not good at looking to the future. Since you are planning to pass through the retirement stage of your life in style instead of as a pauper (and it’s hard to foresee this and save when you receive a full pay-check), this is a real advantage that will help make your retirement as comfortable as possible. If you’re using this plan, you may even retire at age 55 and gain full access to your money, penalty-free! This, in part, is a semblance of the sheer beauty of the plan. Aren’t we poetic?!

Do remember that your contributions deducted from the paycheck are tax-deferred, thereby decreasing your current income tax. (That news calls for a pat on our back!) However, there is a limit to how much you may contribute to a 401(k). This limit is set by the Congress and set forth in the Internal Revenue Code. Your employer, too, may limit your contributions to a percentage of your salary, depending on how much he really likes you. Additionally, he may also choose to match all or a part of your contribution. (Yes, it’s time for you to go through your company’s policies regarding the plan if you haven’t already!) It’s also time to polish those rusty apple polishing skills – pun intended!

Most 401(k) plans provide you with a range of investment options, including stock funds, bond funds, balanced funds, international funds, and company stock. You may decide (on your own) how your contributions are distributed among the plan’s offerings by considering your long-term financial objectives, your tolerance for risk, and how close you are to retirement age. We do not advise you to fear risky investments since those are the ones making the greatest amount of money. Others may think differently and suggest that a more conservative allocation strategy is ideal as you get older. Don’t pay too much attention to those behind the times financial advisors; they’re all ageist!

Regardless of your allocation strategy, it is critical to closely monitor the progress of your 401(k) plan. The plan is required by law to provide you with an annual statement in order to assist you with the management. Many plans will also provide you with quarterly statements, online access, and toll-free numbers offering 24/7 access to your current balance.

Each 401(k) plan also specifies when and how often you can make changes to your investments. While some plans permit you to make daily changes, others allow a limited number of transactions per year. At any rate, you are responsible for checking up on your plan’s performance and making allocation changes whenever deemed appropriate. Please make sure you’re not smashed on the day you decide to make those changes!

Certain 401(k) plans also allow you to access your savings in case of a financial emergency before reaching the age of eligibility. This access may come through a loan (with interest) or a hardship withdrawal. In case of a hardship withdrawal you will have to pay ordinary income tax on the amount withdrawn and pay a 10% penalty to the government if you don’t meet one of the following exceptions: (1) purchasing a principal residence; (2) avoiding eviction from your present residence; (3) paying tuition for yourself, your spouse, children or dependents; (4) funeral expenses for a family member; and (5) medical expenses exceeding 7.5% of your AGI.

Oh and we lied when we said that the 401(k) plan always permits you to make penalty-free withdrawals if you retire at age 55. While it is true that you may make such withdrawals at this particular age, it is also correct that certain 401(k) plans only allow you penalty-free access to your savings at age 59.5 years. Again, it is for you to choose the plan that meets your needs. Just remember that by April 1 following the year in which you turn 70.5 years old or retire (whichever is later), it is obligatory to begin withdrawing from your 401(k). So let’s hope you will have so much money coming in that you won’t have to withdraw before turning 70.5! Yes, were also finding it a little odd that we have to refer to ages in decimals (who says seventy point five ?!)- But that’s how it goes, my friend!

2010 Health Savings Account Contribution Limits Set

admin — Fri, 13 May 2011 11:55:47 +0000

The U.S. Treasury and IRS have already announced what the maximum contributions will be for Health Savings Accounts or HSA in 2010. Individuals may contribute up to $3,050 in 2010 and families may contribute up to $6,150 per year. Also, individuals aged 55 or older can contribute $1,000 as a catch-up contribution. The money that HSA participants contribute to their HSA is tax-deductible from their annual income taxes.

In addition to the maximum contribution amounts that HSA participants can contribute each year, there are also maximum out-of-pocket spending caps. In 2010, individuals must have a maximum out-of-pocket spending cap of $5,950. Families must have a maximum out-of-pocket spending deductible of $11,900.

Minimum insurance deductibles are also determined by the government. In 2010, individuals must have a minimum insurance deductible of $1,200 for their high deductible insurance plans. Families must have a minimum deductible of $2,400 for their high deductible insurance plans.

Each of these figures increased by $50 for individual HSA participants and at least $200 for family HSA participants.

What is a Health Savings Account?

A Health Savings Account is a savings account in which participants can put money that they earmark for healthcare expenses. The contributions that HSA participants make towards their HSA each year is reduced from their income tax burden, which helps to save HSA participants money off of their income taxes.

HSA participants can use the money that they put into their Health Savings Accounts to help pay for qualifying healthcare expenses. Often, the healthcare expenses that are covered by Health Savings Accounts are greater than healthcare expenses that are covered by many health insurance plans.

If HSA participants want to use the money in their HSA to pay for non-qualifying healthcare expenses or for expenses not related to healthcare, they can withdraw the funds from their HSA at any time. When they make their withdrawals, the funds will be taxed at that time. However, funds will not be taxed if they are spent on qualifying healthcare expenses.

One of the many benefits of enrolling in a HSA plan is that individuals and families are generally able to save thousands of dollars each year while growing their wealth. The money that HSA participants invest in their HSA can be invested in other high interest-yielding vehicles, such as stocks and bonds. In this sense, HSA are similar to IRAs.

Also, because Health Savings Accounts are combined with high deductible health insurance plans, Health Savings Account participants can save a significant amount of money each month off of the cost of their health insurance premiums.

Where to get a Health Savings Account

Many Health Savings Account participants are able to get their HSA through their employers. In this case, many employers also make contributions to Health Savings Accounts for their employees, which are tax-deductible for the employer and helps employees to grow their savings. If HSAs are not available through employers, many individuals opt to enroll in Health Savings Accounts on their own as individuals or as families.

Many health insurance providers offer HSA options as part of their menu of health insurance plans. It is important that individuals wishing to enroll in HSA find qualifying high deductible health insurance plans that are specifically suited to correspond to HSA.

It may also be helpful for individuals wishing to enroll in HSA to contact an experience Health Savings Account advisor who can help them find the right plan for their needs and their budgets. HSA advisors can also answer any questions that individuals may have about HSA plans, as they may be different than health insurance plans that many individuals are accustomed to.

Ultimately, HSAs tend to save individuals and families thousands of dollars each year off of the cost of their healthcare. With the HSA contribution increase in 2010, HSA participants can put more money away for savings than ever before.

The Tax Benefits of Dying in 2010

admin — Mon, 25 Apr 2011 05:41:03 +0000

They say death and taxes are the only two things you can really count on. Well, 2010 is shaping up to be a really good year to die because the estate tax is being set aside for a year under a law passed way back in 2001.

Obviously, there is really no good year to die. When considering estate taxes, however, it is a subject that has to be discussed. With this in mind, the 2010 year presents a very unique situation. One of the biggest, nastiest taxes in the Internal Revenue Code is terminated for just this year and can result in huge savings for those who pass on.

The estate tax is a brutal tax because, well, the dead can’t vote. The tax works by creating a certain dollar amount exemption for an estate and then massively taxing any value above that amount. It is one part of the tax code that only makes sense with an example, so let’s look at one.

The estate tax changes each year. That being said, it traditionally has had an exemption amount of $1,000,000 and a tax rate of 55 percent. [Yes, 55!]. So, let’s say I die with a home, retirement account and term life insurance policy for $1,000,000. My wife and two kids survive me. The total value of my estate is $1.6 million dollars. Remember, my $1,000,000 life insurance policy counts as part of it.

So, what is my tax situation? Well, the first million is passed on tax free. The tax on the remaining $600,000 is huge. At 55 percent, we are talking $330,000 in tax. So my family ends up with $1,270,000 right? Nope. They will also have to pay estate tax at the state level and income tax on the distributions from the retirement account. Overall, the taxes may eat as much as one half of what I left them. It is a huge tax burden.

2010 is a unique year. Why? There is no estate tax this year. Yes, you read that right. It has been phased out over the years under a 2001 law. The problem is the phase out ends at the end of this year and returns to the one million/55 percent standard on January 1, 2011.

This is why 2010 is a good year to die. Well, as good as it can be!

President Obama’s Proposed Income Tax Changes For 2011

admin — Wed, 23 Mar 2011 19:13:24 +0000

The 2001 and 2003 Bush tax cuts are proposed to change according to President Obama’s tax change proposal. The White House estimates raising approximately $700 billion over 10 years.

President Obama has proposed raising the top 2 tax brackets which affects most higher income Americans who make more than $250,000. According to this proposal the 35% top tax rate on income would increase to 39.6%, and the 33% tax rate would rise to 36%. Included in the proposal are new limits on itemized deductions.

As to long-term capital gain which is currently at 15% the proposal includes changes as follows: the top rate on long-term capital gains, dividends would rise to 20% from 15%. According to President Obama most of these changes would affect upper-income Americans, described as families making more than $250,000.

Previously new laws were passed to phase out estate taxes over several years. In 2010 estate taxes would have been eliminated but as part of this new tax proposal there will be changes made to this new law. As proposed the federal estate-tax changes going into effect in 2010 would change as follows: the basic federal estate-tax exemption is $3.5 million, and the top rate is 45%, excluding transfers between spouses which are tax-free. Currently estate taxes are to be eliminated for 2010 however, president’s plan would extend the $3.5 million estate-tax exemption level into future years, therefore would cancel out laws that were put in place to eliminate the the estate taxes. These taxes will only be eliminated for the year 2010.

Calculating the Kiddie Tax

admin — Fri, 11 Feb 2011 10:31:41 +0000

The term kiddie tax identifies the age in which kids become an individual tax entity separate from their parents for the purposes of calculation of taxes on investment income. Right from birth to the age of fourteen, children might earn investment income of up to double the standard dependent deduction. They are supposed to be taxed on the basis of their tax rate, usually around ten percent. Any sort of investment income above that threshold, would be taxed at the presumably higher tax rate of the parents.

After the age of fourteen, all the investment income has been taxed at the lower rate of the child. The Congress has officially extended the childhood age to 18, for the purpose of calculation of tax on the investment income. As per the Tax Increase Prevention and Reconciliation Act of 2005, passed in May 2006, the age was extended to eighteen. A child is said to be eighteen for the total tax year in which the child turns eighteen. For the year 2006, the threshold in terms of investment income has been fixed at $1,700. The amount is taxed at child’s rate. Anything, which is in excess of this amount, is taxed up at the rate of the parents.

Kiddie tax applies only in case of investment income and not earned income, therefore, teens with jobs would pay income tax as according to their rate and not their parents’. Also, individuals who get married before the age of eighteen are presumed to be adult as they are not children anymore, and in case if filing jointly, they file according to their own rate.

As it is, the change tends to put the future of the accounts set up under the Uniform Gifts to Minors Act, or the Uniform Transfers to Minors Act. As per these acts, the individuals might place the assets in the accounts for benefit of a child, yet retain control over the assets as trustee as long as the child doe not reach the age of majority, generally eighteen. The tax advantage of moving assets to the name of a child might now be deducted as income invested in such accounts over $1,700 would be taxed at the rate of the parent.

With the capital gain rate of five percent, in the ten percent or fifteen percent tax bracket, the parents falling in the higher brackets might still wish to consider the transferring of appreciating assets. However, parents who feel they had the years in between fourteen and eighteen to sell the assets in the portfolio of the child and potentially pay up no capital gain tax have lost the option.

Filing IRS Tax Extension Form Online – E-File Your Tax Return Extension

admin — Sat, 13 Nov 2010 02:22:59 +0000

Though filing tax return is not difficult, most people miss the tax filing deadline. You do not have to worry about getting penalized for late filing. Now you can file IRS tax extension form online and extend the deadline from April 15th 2009 to October 15th 2009. It is quite simple process and you can avoid the rush of April 15. Please note that you are getting extension for filing your return, you are not getting extra time for paying your due.

When you e-file your tax return extension, you will have a considerable time for preparing and filing your return. You do not necessarily have to consult a tax professional. You can have enough time to collect necessary information and documents that may be helpful while you do filing task online. But you cannot afford to waste your time thinking that you are getting sic month your extra time. You need to start doing your task right away as soon as you send your online tax extension, otherwise, once you miss the opportunity then you will have tough time for requesting the other 6 month extension.

You will need to file IRS tax extension form 4868 for getting extension period. Suppose, even though you owe taxes and cannot pay, please note that the failure to pay penalty is only.5% per month, whereas the failure to file penalty is around 5% of the amount owed per month. If you choose to file income tax extension, you will get around that un-filed penalty until October 15th.

If you wish to get tax extension deadline or would like to extend your tax filing deadline, you need to send your documents online by April 15th. You can have nominal interest charges on your tax amount and for that, do your best estimate of taxes you owed. One of the best things is to pay online which is easier, faster and safe.

401k Retirement Plans Offer Tax Advantages

admin — Fri, 08 Oct 2010 07:26:23 +0000

One of the options that some people have for retirement planning is the 401k retirement plans. Employers for employees who meet specific requirements (which the employer can set to some degree) offer this type of retirement plan. As one of the most ideal types of retirement plans, it is highly advisable that anyone who is looking for a way to put money into their retirement consider the use of this particular type.

Tax Advantages

One of the reasons that anyone should use retirement plans is because they offer tax advantages. You could just put money into a savings account or another form of savings and use those funds during your retirement. However, you will pay income tax on those funds not only when you get the funds from your employer but you will also pay taxes on the interest that you earn. To help give you a better method of building your balance, the IRS offers a variety of retirement accounts.

In the 401k retirement plan, individuals set up the account through their employer, though they remain in control of their money and they can even select the types of investments (to some degree) that they would like to invest in. The funding for the retirement account occurs through payroll deductions. You do not have to think about making the payment as it is automatically done for you.

The best benefit is that the funds are deposited into your retirement account pre-tax, which means that there is no income tax applied to them at this point. The funds then enter the retirement account and grow there, tax free. When you reach your retirement, or by 70 ½ years of age, you can begin withdrawing from the account to pay for anything you would like to during your retirement. You are taxed when you take money from the account, but you are taxed at your income tax level at that point, which is generally far lower than what you would be paying now.

Take some time to look into the retirement options that your employer is offering to you. Learn as much as you can about the investment firm and the actual 401k. Even if you have another type of retirement plan in place, you may want to consider using this plan to further your goals especially since it has a higher contribution limit and may be matched by your employer. 401k retirement plans can help you to plan for your particular needs in the future easily.

Retirement and Annuities

admin — Mon, 13 Sep 2010 04:58:39 +0000

IRAs and employer sponsor plans are considered to be the best options for retirement investments. However, investing in annuities can be the next best move on reaching the maximum limit of contributions. A person can invest with an insurance company issuing annuities. At the end of the funding period, the issuer agrees to pay to the investor or any beneficiary named in the contract.

It is very important to understand the various annuity investment options and choose accordingly. The terms and conditions of the different annuities vary and so does the payout options and time periods. Therefore, it is imperative to study and analyze the schemes and the pros and cons of the contracts, before investing any money.

A deferred annuity can be particularly helpful for post retirement benefits. The payment of income tax gets delayed, until the annuity payment starts, as per the agreement. In most states, annuities are free from the creditor claims. In the event of the investor?s death, the spouse may remain covered, with continued payment, in case of joint or joint survivorship annuities.

There are no income tests for an annuity investment and making the investment is a simple and hassle free procedure. Unlike IRAs and employer sponsored plans, the investors are not subject to any annual contribution limit and can invest as much or as little they want. There is no fixed age limit to start receiving the payments. Investors can postpone the payments, until they need the income.

There are certain consequences attached to an annuity investments, regarding the withdrawal of the invested money and penalty taxes applied. The percentage earned is taxed while the principal is not. Therefore, depending on how soon the money is required and time left for retirement, an investor is required to choose the right scheme and company.

Easy Online Income Tax Filing

admin — Mon, 30 Aug 2010 06:03:42 +0000

Easy Online Income Tax Filing

What if you’re not a computer genius? What if you’ve never filed your taxes online before? You’ll be surprised to learn that almost anyone with a computer, and an internet connection, can easily learn to file their taxes online.

You want a tax return that is easy to prepare, easy to understand, and easy to file. With online tax filing you can prepare and e file your tax return in as little as 1 hour.

Have you ever wanted to file your taxes online, but thought that only tax accountants have the knowledge and tools necessary for easy online income tax filing? This is a common misconception that many people have.

With the right tools and information, online tax filing is as easy as point and click. You don’t need any prior tax experience. Just follow the user friendly guides. If you’re interested in quickly preparing an accurate, goof-proof tax return this year, then you’ve made the right choice.

In order to start your tax filing online, you’ll need a tax filing website that offers online software designed for easy tax preparation. With online tax software you won’t have to download a thing. Simply sign up for a user account, and you should be able to use the software immediately and for free.

Once you’re logged in, and ready to begin the actual tax filing process, you’ll be shown easy step by step directions for filing your income tax online. All you have to do is follow along.

So make this year the year you leave pen and paper behind, and try easy online income tax filing.

The Best Cash Back Credit Card

admin — Thu, 26 Aug 2010 22:55:45 +0000

Cash credit cards open up whole new revenues for spending and saving money. You now have a choice of saving the cash that you are going to receive or spending it for more things. Most of the lending institutions give you the opportunity to save your earnings by letting them put it into a savings account that will draw interest. Many people like doing this because for reason it helps to defer the cost of using the credit. This is often a good way to make your credit card less expensive. A combined savings with your card is the ideal way to use credit.

A cash back credit card can be used by the user as a means to help others by donating your cash back to a non-profit in return you can use that donation as a tax deduction. People normally use the cash back as a means to buy other items that will help them with their family budget. Cash credit cards are a welcome sight when the refund check comes to the consumer. Many claim it is almost like getting an income tax check refund. It depends on the amount of credit that you are using as to the amount of your cash back refund.

Remember that this refund is based on your line of credit and how much you spend. It also depends on how much you are paying the company towards the APR%. You do not want to find out that you owe a lot more than you are getting back in returns. The cash back card can be a welcome stimulus to your income so just use the credit spending wisely.