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Is homeownership still a good deal from a tax perspective?

Homeownership can often constitute a smart investment, especially if you purchase property to rent out and generate income. But adjustments to the tax code have changed the way some people look at homeownership. Is it still a good means of reaping tax benefits?

Tax breaks for homeowners

If you own property, there are a number of expenses you can deduct on your tax return, including:

  • Interest on a mortgage of up to $750,000 ($375,000 if you’re married filing separately) if your loan was signed after December 15, 2017.
  • Interest on a mortgage of up to $1 million ($500,000 if married filing separately) if your loan was signed before December 15, 2017.
  • Property taxes of up to $10,000 (with a caveat, which we’ll discuss below).

It’s worth talking about the property tax deduction, because that $10,000 allowance doesn’t tell the whole story. That figure is inclusive of state and local taxes, so if you live somewhere where those taxes are high and property taxes are also high, you may not get to deduct your entire property tax bill.

How do homeownership tax benefits stack up?

Owning a home doesn’t give you as much tax-related leeway as it once did. It used to be that property taxes of any amount could be deducted on your return, but following the Tax Cuts and Jobs Act of 2017, that rule changed, and homeowners are now capped at $10,000. That’s a harsh blow for folks who live in states with high property taxes.

The $750,000 mortgage cap is also a result of the Tax Cuts and Jobs Act. Prior to late 2017, homeowners could deduct interest on a home loan of up to $1 million. And while that change may not impact the typical U.S. homebuyer, it certainly hasn’t helped buyers in more expensive corners of the country.

As such, the tax breaks associated with homeownership are no longer as robust as they once were. But that’s not all. In conjunction with the aforementioned changes, another change that resulted from the Tax Cuts and Jobs Act was the near doubling of the standard deduction. For the current year, that deduction stands at:

  • $12,400 for single tax filers and married couples filing separately.
  • $18,650 for heads of household.
  • $24,800 for married couples filing jointly.

What this means is that in order to capitalize on the mortgage interest and property tax deduction, your total itemized deductions need to surpass the above-noted totals. Now let’s imagine you’re married filing a joint return and you pay $10,000 in mortgage interest this year, and you can claim another $10,000 via the SALT deduction, which encompasses property taxes. Unless you have other items to write off, itemizing on your tax return won’t make sense, which means you won’t get to claim any homeowner tax breaks at all.

It still pays to own

Not everyone will benefit from the aforementioned homeowner tax breaks. But if the cost of owning is comparable to that of renting, then it generally pays to own.

Even if you don’t reap too many tax benefits along the way, you might snag a very lucrative tax break when you go to sell your home. Thanks to the capital gains exclusion, you can avoid paying taxes on up to $500,000 in profits on your home ($250,000 if you’re single).

Normally, when you sell assets for more than what you paid for them, the IRS gets a piece of your profits. For example, if you buy shares of a given stock at $50 apiece and sell them two years later for $70 apiece, you’ve made $20 per share, and the IRS will take a modest cut. But if you sell your home for more than what you paid for it, you won’t pay taxes on up to $250,000 or $500,000 of your profit, depending on your filing status, provided you lived in that home for at least two years during the five-year period prior to its sale.

Another thing: The improvements you make to your home while you’re living in it can help reduce whatever gains on its sale you’d otherwise be liable for. Let’s assume you’re married and bought a home for $250,000, only now you’re able to sell it for $800,000. That’s a $550,000 gain, and you’d normally be liable for taxes on $50,000 of that. But if you made $50,000 worth of home improvements (not repairs), you can add that $50,000 to the cost basis of your home, thereby eliminating your tax burden.

The takeaway? Homeowners are still privy to a host of tax benefits — but that shouldn’t be your sole motivation for buying a place of your own. We don’t know what changes the tax code might have in store in the future, and so while there are definitely tax breaks at play right now, you should buy a home because you want to build equity in a property, put down roots, and enjoy living by your own rules, not a landlord’s. You shouldn’t necessarily rush into homeownership merely to shield some income from the IRS.

The Motley Fool has a disclosure policy. Editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from Millionacres is separate from The Motley Fool editorial content and is created by a different analyst team.

Article By: Maurie Backman

Originally posted: https://www.msn.com/en-us/money/realestate/is-homeownership-still-a-good-deal-from-a-tax-perspective/ar-BBZtCVv?li=BBnbfcN

9 Simple Money Moves to Make Before 2019 Ends

The calendar has reached the final month of the year, giving you just days to make some year-end financial moves. These strategies can help lower the risk of identity theft and give you a better picture of your financial health.

None of them should take long — you can probably knock them out during the commercial breaks of your favorite TV shows.

1. Change passwords

Update all passwords for next year, especially those for bank, credit card and other sensitive accounts.

You could use a notebook and pen to record your new passwords, but a much better idea is a password manager. Most will generate and store strong passwords for you. Then, you only have to remember one.

We explain password managers in detail and offer a free option and a paid option in “The Best Way to Remember and Protect All Your Passwords.”

It’s not the usual blah, blah, blah. Click here to sign up for our free newsletter.

2. Request a free credit report

Federal law entitles you to one free credit report every year from each of the three major credit-reporting agencies. Download one during a commercial break, and review it for mistakes or suspicious activity.

Make sure you request reports via AnnualCreditReport.com, the official website for free credit reports. Other websites might send you reports, but there’s usually a catch.

For example, the site might automatically enroll you in a credit-monitoring service or some other subscription program. While you’re at it, check out our Solutions Center for help with credit card debt.

Related: A Veteran Thrift Store Shopper Shares His 8 Best Secrets

3. Review your FSA balance

A rule enacted a few years ago permits employers to let flexible spending account participants roll over up to $500 into the next year.

Note, however, that employers aren’t required to offer a grace period or a rollover. So, now’s the time to find out your employer’s policy.

If the employer does not participate in either option, use the few minutes of a TV commercial break to go shopping. Spend that money on qualified expenses by doing things like refilling prescriptions or maybe buying new glasses.

4. Complete an investment review

Does an investment review sound time-consuming? It’s not, really. You can do one in 15 minutes or less with these steps. In a nutshell, you want to check your investment performance, review your fees and reallocate balances if needed.

While examining and understanding your investments might seem boring, it’s exciting compared with the commercials you’ll be missing.

5. Sell losses to offset gains

Look for losers among your investments and consider unloading them. Selling a stock or other security at a loss can offset investment gains you’ve taken during the year, thus lowering your tax bill.

There are a couple of caveats. For starters, losses in tax-advantaged retirement accounts — like an IRA or 401(k) — aren’t deductible.

You also cannot game the system by selling a stock at a loss, then buying it back a few minutes or days later. For an investment loss to be deductible, you can’t purchase a substantially identical security within 30 days before or after a sale.

6. Scan and shred paperwork

Have a teen in the house? Let him or her scan the mess of paperwork you’ve been hoarding all year onto the computer and then shred the originals. If that doesn’t sound like fun to your kid, you can always pay him or her a few bucks.

For those of you who are childless, never fear. This is a rather mindless year-end task that can be easily accomplished during your annual viewing of “It’s a Wonderful Life.”

7. Make a will

This may not seem like a quick-and-easy money move, but if you have a simple estate, there’s no reason to make things complicated. Search online for “will template” and your home state, and you’ll find all sorts of fill-in-the-blank wills that can be downloaded free. If you don’t have a will, these will do for now.

If that doesn’t sound like an adequate long-term solution, have your will reviewed by an estate attorney later. But even a cheap internet will that you prepare during a commercial break is better than none.

8. Create a budget

Creating a budget is easy today. All you need is the use of a free service such as that offered by our partner You Need a Budget (YNAB).

When you use a site or app like Mint or You Need a Budget, you give it your bank account information and create expense categories. Then, your goals and spending are automatically tracked and updated. You can get started during a commercial break.

If you want to stick to the old-fashioned method of budgeting with paper and pencil, no worries. Just check out our free budgeting spreadsheets.

9. Update beneficiaries

The end of the year is a good time to review your designated beneficiaries and update them as needed. Did you get married? Divorced? Have kids? Have a falling out?

Make sure you have the right people listed as your beneficiaries on accounts such as:

  • Life insurance
  • Annuities
  • Bank accounts
  • Retirement accounts, including IRAs and 401(k)s

https://www.msn.com/en-us/money/personalfinance/9-simple-money-moves-to-make-before-2019-ends/ar-BBR7g6h?li=BBnbfcN

9 Smart Strategies for Handling RMDs

 

After decades of squirreling away money in tax-advantaged retirement accounts, investors entering their seventies have to flip the script. Starting at age 70½, Uncle Sam requires taxpayers to draw down their retirement account savings through annual required minimum distributions. Not only do you need to calculate how much must be withdrawn each year, you must figure and pay the tax on the distributions.

There’s no time like the present to get up to speed on the RMD rules. Once you know the basic rules, graduate to smart strategies that can whittle down these taxable distributions and make the most of the money that you must withdraw. Uncle Sam may not give you a choice on taking these distributions, but you do have options for handling the money. “Retirement income planning is as much about managing distributions as investment income,” says Rob Williams, vice president of financial planning for the Schwab Center for Financial Research.

RMD Basics No. 1: When is your First RMD Due?

First, let’s start with the basics. Original owners of traditional IRAs are subject to required minimum distributions when they turn 70½. The RMD is taxed as ordinary income, with a top tax rate of 37% for 2019.

You must take your first RMD by April 1 of the year after you turn 70½. The second and all subsequent RMDs must be taken by December 31.

An account owner who delays the first RMD will have to take two distributions in one year. For instance, a taxpayer who turns 70½ in March 2019 has until April 1, 2020, to take his first RMD. But he’ll have to take his second RMD by December 31, 2020.

To determine the best time to take your first RMD, compare your tax bills under two scenarios: taking the first RMD in the year you hit 70½, and delaying until the following year and doubling up RMDs. “It’s important to look at whether [doubling up] will push you into a higher tax bracket,” says Christine Russell, senior manager of retirement and annuities for TD Ameritrade, and whether it will subject you to higher income-related Medicare premiums. Doubling up could be the right strategy, however, if you’re retiring in the year you turn 70½ and your wages plus the first RMD would push you into a higher tax bracket.

RMD Basics No. 2: How to Calculate RMDs

To calculate your RMD, divide your year-end account balance from the previous year by the IRS life-expectancy factor based on your birthday in the current year. For most people, the appropriate factor is found in Table III toward the end of IRS Publication 590-B. Let’s say an IRA owner with an account balance of $750,000 as of December 31, 2018, turns 72 in 2019. The RMD for 2019 will be about $29,297. (Calculate your 2019 RMD right now.)

If you own multiple IRAs, you need to calculate the RMD for each account, but you can take the total RMD from just one IRA or any combination of IRAs. For instance, if you have an IRA that’s smaller than your total RMD, you can empty out the small IRA and take the remainder of the RMD from a larger IRA.

A retiree who still owns 401(k)s at age 70½ is subject to RMDs on those accounts, too. But unlike IRAs, if you own multiple 401(k)s, you must calculate and take each 401(k)’s RMD separately. A retired Roth 401(k) owner is also subject to RMDs from that account at age 70½, though the distributions would be tax-free.

You can take your annual RMD in a lump sum or piecemeal, perhaps in monthly or quarterly payments. Delaying the RMD until year-end, however, gives your money more time to grow tax-deferred. Either way, be sure to withdraw the total amount by the deadline.

RMD Basics No. 3: Penalties for Missing RMD Deadlines

What happens if you miss the deadline? You could get hit with one of Uncle Sam’s harshest penalties—50% of the shortfall. If you were supposed to take out $15,000 but only took $11,000, for example, you’d owe a $2,000 penalty plus income tax on the shortfall. “Fifty percent is a hefty price to pay,” says Williams.

But this harshest of penalties may be forgiven—if you ask for relief. “Fortunately, the IRS is relatively lenient, as long as once you realized you missed it, you take your RMD,” says Tim Steffen, director of advanced planning at Robert W. Baird & Co. You can request relief by filing Form 5329, with a letter of explanation including the action you took to fix the mistake.

One way to avoid forgetting: Ask your IRA custodian to automatically withdraw RMDs. At Fidelity Investments, “about 50% have chosen to automate” RMDs, says Joe Gaynor, Fidelity’s director of retirement and income solutions.

RMD Strategy No. 1: Work Waiver

Now that we’ve covered the basic RMD rules, it’s time to look at all the options for minimizing those required distributions.

First, check to see if you have an RMD escape route. Every rule has an exception, and the RMD rules are no different. There are a number of instances where you can reduce RMDs—or avoid them altogether.

If you are still working beyond age 70½ and don’t own 5% or more of the company, you can avoid taking RMDs from your current employer’s 401(k) until you retire. You must still take RMDs from old 401(k)s you own and from your traditional IRAs.

But there’s a workaround for that: If your current employer’s 401(k) allows money to be rolled into the plan, says Kelly Famiglietta, vice president and partner of retirement plan services at financial-services firm Charles Stephen, “you could roll in the other accounts to postpone all RMDs.” And, voila!, you won’t have to take any RMDs until you actually retire.

RMD Strategy No. 2: Roth Rollovers

For those who own Roth 401(k)s, there’s a no-brainer RMD solution: Roll the money into a Roth IRA, which has no RMDs for the original owner. Assuming you are 59½ or older and have owned at least one Roth IRA for at least five years, the money rolled to the Roth IRA can be tapped tax-free.

Another Roth solution to say goodbye to RMDs: Convert traditional IRA money to a Roth IRA. You will owe tax on the conversion at your ordinary income tax rate. But lowering your traditional IRA balance reduces its future RMDs, and the money in the Roth IRA can stay put as long as you like. “It’s something to consider, particularly now that tax rates are lower,” says Scott Thoma, principal at Edward Jones.

Converting IRA money to a Roth is a great strategy to start early, but you can do conversions even after you turn 70½. You must take your RMD first. Then you can convert all or part of the remaining balance to a Roth IRA. You can smooth out the conversion tax bill by converting smaller amounts over a number of years.

“Roth conversions are a hedge against future increases in taxes, and they provide flexibility,” says Williams. For instance, while traditional IRA distributions count when calculating taxation of Social Security benefits and Medicare premium surcharges for high-income taxpayers, Roth IRA distributions do not. And if you need extra income unexpectedly, tapping your Roth won’t increase your taxable income.

RMD Strategy No. 3: Carve Outs

About five years ago, a new option known as the qualified longevity annuity contract, or QLAC, arrived. You can carve out up to $130,000 or 25% of your retirement account balance, whichever is less, and invest that money in this special type of deferred income annuity. Compared with an immediate annuity, a QLAC requires a smaller upfront investment for larger payouts that start years later. The money invested in the QLAC is no longer included in the IRA balance and thus is not subject to RMDs. Payments from the QLAC will be taxable, but because it is longevity insurance, those payments won’t kick in until about age 85.

Another carve-out strategy applies to 401(k)s. If your 401(k) holds company stock, you could take advantage of a tax-saving opportunity known as net unrealized appreciation, says Russell. You roll all the money out of the 401(k) to a traditional IRA, but split off the employer stock and move it to a taxable account, paying ordinary income tax on the cost basis of the employer stock. You’ll still have RMDs from the traditional IRA, but they will be lower since you removed the company stock from the mix. And any profit from selling the shares in the taxable account now qualifies for lower long-term capital-gains tax rates.

RMD Strategy No. 4: Younger Spouse

In the beginning of this story, we gave you the standard RMD calculation that most original owners will use—but original owners with younger spouses can trim their RMDs. If you are married to someone who is more than ten years younger, divide your year-end account balance by the factor listed at the intersection of your age and your spouse’s age in Table II of IRS Publication 590-B—rather than Table III—to calculate your RMD. Table II factors in the younger spouse’s longer life expectancy, reducing your required distribution.

For instance, if you are 72 and married to a 59-year-old, Table II tells you to use a factor of 27.7. If your IRA was worth $500,000 at year-end 2018, you’d take out about $18,051 in 2019. That’s about $1,480 less than if you used the calculation that didn’t take into account your younger spouse’s life expectancy.

RMD Strategy No. 5: Pro Rata Payout

If you can’t reduce your RMD, you may be able to reduce the tax bill on the RMD—that is, if you have made and kept records of nondeductible contributions to your traditional IRA, says Steffen. In that case, a portion of the RMD can be considered as coming from those nondeductible contributions—and will therefore be tax-free.

Figure the ratio of your nondeductible contributions to your entire IRA balance. For example, if you contributed a total of $200,000 to your IRA and $20,000 was nondeductible, 10% of a distribution from the IRA will be tax-free. Each time you take a distribution, you’ll need to recalculate the tax-free portion until all the nondeductible contributions have been accounted for.

RMD Strategy No. 6: Re-invest

If you can’t reduce or avoid your RMD, look for ways to make the most of that required distribution. You can build the RMD into your cash flow as an income source. But if your expenses are covered with other sources, such as Social Security benefits and pension payouts, put those distributions to work for you. After all, “the IRS isn’t telling you to spend the money,” Williams says. “It just wants the tax dollars from you.”

While you can’t reinvest the RMD in a tax-advantaged retirement account, you can stash it in a deposit account or reinvest it in a taxable brokerage account. If your liquid cash cushion is sufficient, consider tax-efficient investing options, such as municipal bonds. Index funds don’t throw off a lot of capital gains and can help keep your future tax bills in check.

If you’re selling investments to satisfy your RMD, review your portfolio’s allocation. “You could use the RMD to reallocate,” says Gaynor. Meet the RMD by selling off investments in overweighted categories, and you’ll rebalance your portfolio back to your target allocations at the same time.

RMD Strategy No. 7: Transfer In-Kind

Remember that the RMD doesn’t have to be in cash. You can ask your IRA custodian to transfer shares to a taxable brokerage account. So you could move $10,000 worth of shares over to a brokerage account to satisfy a $10,000 RMD. Be sure the value of the shares on the date of the transfer covers the RMD amount. The date of transfer value serves as the shares’ cost basis in the taxable account.

The in-kind transfer strategy is particularly useful when the market is down. You avoid locking in a loss on an investment that may be suffering a temporary price decline. But the strategy is also useful when the market is in positive territory if you feel the investment will continue to grow in value in the future, or if it’s an investment that you just can’t bear to sell. In any case, if the investment falls in value while in the taxable account, you could harvest a tax loss.

RMD Strategy No. 8: Give to Charity

If you are charitably inclined, consider a qualified charitable distribution, or QCD. This move allows IRA owners age 70½ or older to transfer up to $100,000 directly to charity each year. The QCD can count as some or all of the owner’s RMD, and the QCD amount won’t show up in adjusted gross income.

The QCD is a particularly smart move for those who take the standard deduction and would miss out on writing off charitable contributions. But even itemizers can benefit from a QCD. Lower adjusted gross income makes it easier to take advantage of certain deductions, such as the write-off for medical expenses that exceed 10% of AGI in 2019. Because the QCD’s taxable amount is zero, the move can help any taxpayer mitigate tax on Social Security or surcharges on Medicare premiums.

Say your RMD is $20,000. You could transfer the whole $20,000 to charity and satisfy your RMD while adding $0 to your AGI. Or you could do a nontaxable QCD of $15,000 and then take a taxable $5,000 distribution to satisfy the RMD.

The first dollars out of an IRA are considered to be the RMD until that amount is met. If you want to do a QCD of $10,000 that will count toward a $20,000 RMD, be sure to make the QCD move before taking the full RMD out.

Of course, you can do QCDs in excess of your RMD up to that $100,000 limit per year. “A QCD can be your RMD, but it doesn’t have to be,” says Steffen.

RMD Strategy No. 9: RMD Solution

You can also use your RMD to simplify tax payments. With the “RMD solution,” you can ask your IRA custodian to withhold enough money from your RMD to pay your entire tax bill on all your income sources for the year. That saves you the hassle of making quarterly estimated tax payments and can help you avoid underpayment penalties.

Because withholding is considered to be evenly paid throughout the year, this strategy works even if you wait to take your RMD in December. By waiting until later in the year to take the RMD, you’ll have a better estimate of your actual tax bill and can fine-tune how much to withhold to cover that bill.

……..3 ways Anyone can Build more Wealth

Even if you’re not born into wealth, you can still become wealthy.

Regardless of your financial situation or education, building wealth boils down to three things: Saving, resourcefulness, and maximizing income, according to William D. Danko, coauthor of the best-seller “The Millionaire Next Door.”

His latest book, “Richer Than a Millionaire,” posits the idea that true prosperity is the convergence of good health, happiness, and wealth.

In a recent Q&A with the Washington Post, Danko was asked for his best advice for building wealth “regardless of financial situation and education.” Danko said:

“First, commit to saving 20% of your income. Currently, most save about 5%. It is hard to get ahead and be an investor without saving first.

Second, be a good steward of your resources. This includes having stable personal relationships, and good personal habits. These behaviors will lead to a longer life, and more compounding opportunities.

Third, consider having more than one stream of income. A second job can be beneficial.”

Committing to saving your income is part of setting financial goals. In fact, it’s the key to building any wealth at all, Business Insider previously reported. Specifically, 20% should be put toward an emergency fund, retirement, and paying down debt.

Danko calls it a “stretch goal” — you may not be able to save that much now, but it’s what you should aim for.

“If you earn and spend everything, you cannot build a significant financial net worth,” he said in the Q&A. “You must practice self-imposed financial scarcity. So, if you make $100,000, create a lifestyle that only requires 80% of this, and save/invest the rest.”

The longer you live, the longer those savings and investments will be able to earn compound interest. That’s why it’s important to start investing early.

Research backs up Danko’s point that having a healthy personal life will lead to a longer life — studies show that fostering friendship is key to aging well and boosting happiness, Business Insider’s Erin Brodwin reported. And so do personal habits, like tweaking your diet and getting the right kind of exercise.

Finally, the more income you’re generating, the more money you’ll be able to save, so long as you don’t fall victim to “lifestyle creep.” This will also help you generate passive income, which one financial expert called “the holy grail of ways to make money.”

In fact, one Business Insider contributor has seven separate streams of income, from blogging to real estate, and he says it means he’ll never stop earning money.

https://www.businessinsider.com/the-millionaire-next-door-author-tips-build-more-wealth-2018-11

4 Money Mistakes Millennials Are Making

Re-posted from MSN.COM

The crushing weight of student debt and the Great Recession have shaped millennials’ relationship with money, for better or worse. In some, it has created enough anxiety about financial security that they save as much as they can and avoid any type of credit agreement that could cause them to take on more debt. Others become so preoccupied with their present expenses that they fail to save for the future.

Unfortunately, both approaches have their drawbacks. Here are a few of the most common money mistakes millennials are making — and what you can do to fix them.

1. Not preparing for the unexpected

About 46% of millennials don’t have any money set aside in an emergency fund, according to a 2017 survey by GOBankingRates. This can pose a problem when an unexpected event like a home repair, a costly medical bill, or a sudden job loss puts an extra strain on your budget. Without any savings to cover these financial emergencies, you may have no choice but to take on debt or fall behind on your rent or mortgage payment and other bills, which can have a serious impact on your creditworthiness.

Most experts recommend keeping at least three to six months’ worth of expenses in a savings account to help cover unexpected expenses. Look at your monthly bills and calculate how much you would need to cover them. Then multiply that number by three (or six if you want to be extra safe) and create a weekly savings goal to help you reach it.

2. Avoiding credit

Only 1 in 3 millennials owns a credit card, according to a recent study by Bankrate. While it’s wise not to overuse credit, avoiding it entirely can pose problems, especially when you go to buy a home or finance another big purchase.

Just about everyone will apply for a loan at some point in their lives. When you do, your lender will pull your credit reports to assess how responsible you’ve been with your money in the past. Your credit reports contain information on all active credit accounts in your name, but if you don’t have any, you’re not giving lenders anything to go on. This can make them hesitant to work with you, and they may deny your loan application or charge you a higher interest rate than someone with a well-established credit history. If you’d like to become a homeowner someday, then a nonexistent credit history will be a major obstacle.

You don’t have to use credit cards, but it is important to build up your credit history in some way. Paying off student loans can help, and if you take out an auto loan or personal loan, these will appear on your credit report as well. But for many, credit cards are the ideal credit-building tool because you can use them regularly, and as long as you pay the balance in full each month, you won’t have to pay any interest at all.

3. Not saving for retirement

For many millennials, paying off student loans is a much more pressing concern than saving for retirement. After all, they have 30 to 40 years left to work, so what’s the big deal if they put off retirement savings for a few years?

The trouble is that your most valuable retirement contributions are the ones you make while you’re young. The sooner you put funds in a retirement account, the more compound interest can make them grow. When you get a late start, your money has less time to gain interest before you need to start using it.

Say you put $10,000 in a retirement account when you’re 25 years old. Assuming your investments earn 8% per year, that $10,000 will have grown to $253,000 by the time you’re ready to retire at age 67. If you waited until age 35 to put that money in, it would only grow to $117,000. And if you waited until 45, you’d end up with only $54,000.

Waiting to start saving for retirement may not seem like a big deal, but it can mean a difference of hundreds of thousands of dollars. If you have any extra money left over after you’ve paid your bills each month, put it into your 401(k). If your employer doesn’t offer one, then open an IRA.

4. Spending frivolously

Millennials are more likely to indulge their immediate wants than baby boomers and Gen X-ers are today. In a survey by Schwab, 60% of millennials admit to spending more than $4 on their coffee (though it doesn’t specify how often), and they’re more likely to eat out and spend money on clothing and electronics they don’t need. While it’s healthy to indulge these wants occasionally, doing it frequently can take a large chunk out of your budget, leaving you less money to put toward retirement and your emergency fund.

Take a good look at how much you’re spending on the non-essentials each month and look for areas where you may be able to cut back. Making your coffee at home, rather than purchasing it at your favorite chain, will save you over $1,300 a year on average. This assumes that an average cup of Joe from a cafe is $4, while the cost of making a cup at home is $0.17, and you are drinking one cup per day. Dining in and curbing your shopping could free up even more money.

For millennials, it’s all about maintaining a balance between what you need now and what you’ll need later. By remaining mindful of how your present decisions are impacting your future finances, you’ll be able to make smart choices that will serve you well today and in all of your tomorrows.

A LONG-TERM PERSPECTIVE . . . . . . .

A Long-Term Perspective on the
Stock Market Downturn

Prior to Feb. 2, the stock market had been through a remarkably tranquil period. Since that date, the U.S. stock market has experienced multiple days with drops of 2 percent or more in a short period of time. Here, though, we will focus on the long-term investing concepts you should keep in mind, as well as historical context for market moves of this magnitude.

Short-Term Forecasting

Markets are notoriously difficult to forecast over any horizon, and this difficulty is only amplified over shorter periods of time. Nevertheless, this won’t stop some market “professionals” from trying. You would be wise to ignore these forecasts in your own decision-making. Yes, markets are currently extremely volatile, but that volatility might not continue and no one can reliably know whether stocks will move up or down from here. In fact, no one can even clearly know what caused the drop over the last week. Some commentary we have seen points to inflationary concerns while other pundits blame anxiety around the U.S. budgetary process. Still others believe the market is concerned the Federal Reserve may raise interest rates too quickly. Who’s to say which, if any, of those explanations are correct, much less what that implies going forward. What we do know, though, is that over the long term, you can expect to be rewarded for investing in a low-cost, diversified portfolio of stock funds.

The recent past shows us just how wrong consensus, short-term forecasts can be. Two recent examples are the post-financial-crisis prediction of higher interest rates and the expectation that the stock market would decline following the 2016 presidential election. Both predictions were clearly wrong, and investors who acted on them instead of focusing on the long-run evidence that markets tend to reward risk-taking were harmed.

Your Plan Incorporates Risk

One of the advantages investors have today compared to investors in the early part of the 20th century is that we now have decades-worth of data to help us understand long-run returns and risks. Our partner, BAM Advisor Services, maintains an extensive database of the risk profiles associated with the portfolios that we recommend to clients. This data allows us to incorporate risk into the way we build your financial plan, meaning that outcomes like the market falling by 2, 3 or 4 percent over a handful of days already are reflected in our recommendation. The BAM Advisor Services Investment Policy Committee is well aware that these events — however unpredictable — will eventually happen, and we therefore imbed this knowledge in the comprehensive planning process that results in your portfolio allocation.

Putting Market Risk in Historical Context

The following graph plots the historical annual return of the U.S. stock market in each year (in blue) from 1926 through 2017 and the largest intra-year decline (in light blue outline) that occurred in each of those years.

Annual Stock Market Returns and Intra-Year Declines
There are two primary takeaways from this graph. First, as we all know, the stock market goes up far more often than it goes down. Second, but possibly less well known, virtually every year includes a period of time where markets fell precipitously. It’s clear, though, that these intra-year declines don’t necessarily signal whether the market will be up or down over that particular year. But it does show that stock markets have and always will be risky, particularly over shorter periods of time.

Are There Any Actions to Take?

Given what we know, we obviously don’t recommend making drastic changes to your portfolio allocation as a result of short-term market moves already accounted for in the planning process. Your portfolio is well-thought-through and built to be highly diversified. But are there any other actions worth considering? If you haven’t recently, now could be a good time to reassess your investment plan from a long-term point of view. We’re always here to help with that endeavor.

5 ways the tax bill will affect your retirement

Re-posted from marketwatch.com

The $1.2 trillion tax overhaul that was signed into law by President Trump on Friday will affect your retirement in a number of ways.

The tax plan no longer includes lowering contribution limits on retirement accounts or nixing traditional individual retirement accounts in lieu of Roth individual retirement accounts (which would have shifted when retirement savers pay taxes on their savings), but it does address individual retirement accounts and increases the standard deduction (by almost double), which could affect the way people itemize their charitable donations. These changes would be for next year’s taxes, to be filed in 2019 — 2017 tax returns are due on April 17.

 When it comes to retirement, 60s are the new 50s

Here are five ways retirees will be affected:

Retirees will have to be more strategic about their IRA conversions

The new tax bill would stop what’s called “recharacterizations” of IRAs. Recharacterizations allow a person to undo their decision to rollover or convert accounts to Roth IRAs. Therefore, retirement savers who have already made these conversions this year should consider before the new year if they want to reverse them.

And contribute to charity twice every two years

Retirees likely won’t be itemizing since they don’t have many deductions, except for charitable contributions, property taxes and perhaps state income taxes, said Andrew Houte, director of retirement planning at Next Level Planning and Wealth Management in Brookfield, Wis. Some retirees may want to take advantage of Qualified Charitable Distributions, which allow them to donate directly to charity from their individual retirement accounts without having to itemize those donations (after 70 ½ years old). Because of the increase in the standard deduction, retirees may benefit from making more charitable donations, but less frequently — for example, donate twice as much, but every other year — which would help taxpayers by having more to write off than the standard deduction limit, said Scott Bishop, executive vice president of financial planning at advisory firm STA Wealth in Houston, Texas. More people may also invest in donor-advised funds instead of donating cash, he said.

Personal income tax rates are changing, but still important

Personal income taxes would be lowered for most households — to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Retirees will have to watch their income to avoid ending up in a higher tax bracket, Bishop said. Income includes withdrawals from retirement accounts, required minimum distributions and ordinary income. For example, people with large balances might want to begin distributions before turning 70 ½ years old, when they’ll be required to take distributions in some accounts — that way, when they get there, they won’t be forced into a higher tax bracket. It takes a little calculating, and predicting what income will look like in the future versus now, but it could save retirees money down the road.

Also see: The four worst things about the tax bill

Small businesses may not offer retirement accounts

Most 401(k) plans and similar defined contribution benefits are offered by large employers because they’re too expensive for small businesses to administer. Under tax reform, it may become even less advantageous for small businesses to host these accounts, said Trevor Gerszt, chief executive officer of CoinIRA, a company that allows savers to convert assets into digital currency, such as bitcoin. The bill reduces the income tax rate for small businesses but does not address offering or contributing to retirement plans, which are incentives to establish these accounts, according to the American Retirement Association.

Some retirees may want to move

Deductions for mortgage interest rates were left untouched, and $10,000 in local property taxes will be deductible on a federal level. That means income tax-free states will be best for retirees, according to Brett Anderson, a financial adviser and president of St. Croix Advisors in Hudson, Wis. Retirees are more easily able to move from state to state because they have no job tying them down, he said, which also means they can be more sensitive to the various income tax rates in various states. There are a few states that soar above the rest for tax-friendly states best for retirees, such as Nevada, New Mexico and Wyoming.

The new bill also reduces the maximum amount of mortgage debt a person can acquire for their first or second residence, to $750,000 for married couples filing joint tax returns (or $375,000) for those married filing separately, down from $1 million. This won’t affect home purchases before Dec. 16, 2017 so long as the home closed before April 1, 2018.

To Save More, Focus on Your Needs, Not Your Wants

Re-posted from Investopedia

We all know that being able to save is very important when trying to grow assets. To eventually find financial freedom and have our assets give us the income that we need to live, we need to be able to live on a smaller amount of money than what we are bringing home. However, there are a lot of forces working against us trying to make us spend more. Marketers are getting smarter and more effective in getting us to overspend.

It is true that getting what you need for a smaller price is a good thing, however more people are falling into the trap marketers plant to make us buy more. To become financially successful, you need to understand the difference between buying on sale and being frugal.

Be Aware of Marketers Techniques Use to Make You Buy More

Marketers study human behavior. They know about the mood they need to put you in so that you buy more. They use color, scents, sounds and textures to convince you that you need their products.

Pricing is also an important tool they use. For example, recent research found that coupons actually have neurological effects on customers. They impact happiness and lower stress. Marketers understand that people want a good deal and offering coupons might be a way to get customers to feel good about purchasing their products.

As a financially savvy consumer, you need to be aware of the techniques marketers use so that you can be ready to resist to the temptation. (For related reading, see: Sneaky Strategies That Fuel Overspending.)

Focus on What You Want Versus What You Need

To be smarter with your money, you need to determine the difference between what you want and what you need. Needs are everything you have to have to be able to go on with your day. Besides food, water, shelter and clothing, there isn’t much more we substantially need. Depending on your career choice or goals you are aiming for, there might be other things you need to accomplish them.

The rest of the stuff we buy are wants! To become financially successful, you need to control yourself when dealing with your wants. You need a priority list to help you stay within your budget. This will ensure you have some money to invest for later.

What Is Frugality?

Frugality is not about depriving yourself. It’s not about living a substandard life. It is actually about avoiding waste. To stop you from spending money on stuff you don’t really need, you have to find out what is important to you. There are too many things we buy every day that we end up throwing away. The few dollars you could save can make a huge difference over the long term. Would it be worth it to be frugal with your money if it meant you afford something really important to you later?

Take a hard look at all of the money that you waste on small things and make a plan to control your “want” expenses. If you still decide to purchase a certain want and are able to to buy it on sale, more power to you. It’s time for you to take control over your money. Don’t let marketers dictate how to spend it.

(For more from this author, see: How to Build Your Financial Foundation.)

 

IMPORTANT DISCLOSURES: MoneyCoach LLC and/or Patrick Traverse offer investment advisory and financial planning services through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe), an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe Asset Management offers, or that or its personnel possess a particular level of skill, expertise or training. Insurance products are offered through Belpointe Insurance, LLC and Belpointe Specialty Insurance, LLC. MoneyCoach LLC is not affiliated with Belpointe Asset Management, LLC. 

 

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