(BPT) - If you had to grade your financial literacy, what would it be? Are you an A+ saver, investor and planner, or do you think you could do better? If you grade yourself average at best, you’re not alone.
When asked to grade their own financial literacy, more than half of Americans say they’d earn a “C” or lower, according to new data from Prudential Financial. This isn’t surprising, considering data from Prudential’s Financial Wellness Census shows less than half of Americans are on track to meet their financial goals, including planning for retirement.
“Regardless of where you are on your family’s financial wellness journey, the best way forward is through financial literacy,” says Prudential Advisors President Brad Hearn. “Researching, educating yourself and getting advice from a financial professional can help you make the best decisions based on your life stage, risk tolerance and goals.”
Hearn says each family’s situation and goals are unique, and things like life stage and personal preference will impact how they choose to prepare for their financial future. To get started, here are five financial wellness basics every family should master:
Set up an emergency fund
Life is a series of experiences, and sometimes the unexpected can hit your finances hard. Whether it’s a car breaking down, your AC unit on the fritz or even losing a job, it’s important to be prepared for emergencies. If you don’t already have an emergency fund, start saving a little each month until you reach your goal. A good rule of thumb is to have three months’ worth of expenses saved in an emergency fund. So, if your monthly expenses are $2,500, you should have $7,500 saved.
Create a budget
Saving for college? A new car? How about starting that emergency fund? Whatever your family’s financial goals are, it’s important to have a plan in place that helps you achieve those goals. Budget to manage day-to-day expenses, and include in that budget a commitment to save for bigger milestones. For tips on getting started, do some research. There’s no shortage of advice, whether you decide to go it alone or consider using the help of a professional financial advisor.
Plan for the unimaginable
If you have people who count on you for financial support or caregiving, you should have life insurance. A life insurance policy can help give your family financial peace of mind should the worst happen. There is no rule as to how much life insurance you need, but important things to consider are your annual income, mortgage debt, potential college costs for kids and other future financial obligations.
Save for retirement
According to Prudential data, of Americans who have retirement savings and debt, nearly one-quarter have more in total debt than in retirement savings (23%), while 15% of Americans say that they have no debt, but also have nothing saved for retirement. Planning for retirement is something that should start as soon as possible. If your work offers any type of matching program, make sure to take advantage. If you don’t, you’re essentially leaving free money on the table.
Seek professional advice
Retirement, life insurance and savings can be confusing. Information overload is partly to blame. According to Prudential data, two-thirds of Americans agree that the list of things they need to learn to successfully manage their finances keeps growing, not shrinking. That’s where financial literacy programs and professional financial advice can play a key role. Nearly two-thirds of Americans don’t have a financial advisor. They say they cannot afford one (42%) or don’t believe their financial situation warrants needing an advisor’s help (26%). The reality is that advice is more within reach than ever before — and it’s not just for the wealthy. A financial professional can help at various stages in life and work with you to create a strategy based on your timeline, risk tolerance and goals.
“Financial wellness isn’t always a matter of having more money,” says Hearn. “Instead, it’s a journey that takes a combination of proactive effort, dedication and professional guidance.”
Prudential Advisors is a brand name of The Prudential Insurance Company of America and its subsidiaries. Life insurance is issued by The Prudential Insurance Company of America, Newark, NJ and its affiliates.
With the increasing likelihood that Social Security and Medicare benefits may be reduced in the future, it’s more important than ever to use every technique available to maximize your retirement savings. These three outside-the-box strategies could make an enormous difference in your retirement readiness. The sooner you start, the more you may save.
(BPT) - Individuals who rushed to prepay property taxes after the passage of the Tax Cuts and Jobs Act may have saved some money in 2018 — but that’s pennies compared to the long-term tax savings taxpayers should take advantage of before the TCJA’s individual tax provisions are expected to expire in 2026, according to Robert Fishbein, vice president and corporate counsel at Prudential Financial.
Also expected to expire in 2026? According to trustees for Social Security, that’s when Medicare’s main trust fund will run out of money. With the increasing likelihood that Social Security and Medicare benefits may be reduced in the future, it’s more important than ever to use every technique available to maximize your retirement savings.
Three outside-the-box strategies could make an enormous difference in your retirement readiness. The sooner you start, the more you may save.
Fund an HSA for retirement health care
Estimates suggest even a healthy 65-year-old couple will need at least $275,000 to cover retirement health care costs. A Health Savings Account, or HSA, provides a way to save that money without paying a dime in taxes. An HSA account is available to individuals enrolled in a high deductible health insurance plan.
First, these individuals can fund their HSA through a tax-deductible contribution or pre-tax payroll deduction. Second, any interest and investment gains are tax-free. Finally, the funds can be withdrawn tax-free to pay for qualified medical expenses— a triple tax advantage over a traditional savings account.
The best part? There is no requirement to use HSA funds in the year of contribution, which means funds can grow on a tax-favored basis for future health care expense needs.
For 2018, family contribution limits are $6,900, or $7,900 if you are 55 or older, and those amounts are indexed for inflation in future years. If you start contributing the maximum even as late as age 55, and earn 3 percent per year, you could have more than $90,000 to pay for your retirement health care by age 65. If you start contributing the maximum as early as age 40, you could have saved almost $270,000. These funds will continue to grow tax-free in retirement until you need them.
If you don’t use HSA funds in full before you die, excess funds are subject to income tax, but will be otherwise available for your heirs.
Consider a Roth IRA conversion
The typical dogma says that converting an IRA or traditional 401(k) to a Roth IRA does not make sense if you expect your tax rate in retirement to be lower than at the time of conversion. However, lesser known benefits of a Roth IRA may make it worthwhile to have at least part of your retirement assets in Roth IRA form.
Start with no required minimum distributions. With a Roth you aren’t forced to draw down your funds once you attain age 70½ and can continue to benefit from the tax-free growth, thereby maximizing the after-tax funds eventually available for you or your heirs.
Another significant benefit of a Roth IRA or Roth 401(k) is tax diversification. For example, you may choose to take taxable distributions up to a certain amount and then tax-free distributions to avoid a higher income tax bracket.
If you are a high-income taxpayer, Roth IRA distributions are not considered income when determining thresholds for increased Medicare premium charges or the 3.8 percent income tax surcharge on investment gain. If your income is more modest, Roth IRA distributions are not considered income when determining whether you are subject to income tax on Social Security benefits.
If anything, a conversion is more attractive now since you have an opportunity to convert and pay income tax with marginal rates that are generally lower than under prior law. Since individual tax law changes are temporary and tax rates will revert to the former higher amounts starting in 2026, you have an eight-year window to benefit from lower rates.
Make “backdoor” Roth IRA contributions
The tax law prescribes income limits so high-income individuals may not make a direct contribution to a Roth IRA. However, there are no income limits on converting traditional IRA funds to a Roth IRA.
Any person under age 70.5 who has earned income by year-end can make an IRA contribution. While income limits may prevent you from making a pre-tax contribution, you can make this contribution even if you have fully funded a 401(k) or another employer plan.
Once you have made your contribution to a traditional IRA, simply convert that amount to your Roth IRA. As long as this is your only traditional IRA and you have made an after-tax contribution, then an immediate conversion will have converted a tax-deferred asset into a potentially tax-free asset. If you have multiple IRAs, the IRAs are aggregated to determine how much is taxable upon conversion.
While we spend much time on our investment strategies to help gain an extra percentage or two of investment yield, these tax planning strategies can be a more reliable way of maximizing your after-tax retirement income and wealth for your family — no matter how Social Security and Medicare turn out.
Prudential Financial, its affiliates, and their financial professionals do not render tax or legal advice. Please consult with your tax and legal advisors regarding your personal circumstances.
Here are four steps to take today to spruce up your money management process and get yourself on the path to financial health.
(BPT) - Are you feeling good about your finances? Or do phrases like “account balance,” “credit score” and “retirement savings” give you a twinge of anxiety?
Don’t worry, you’re in good company. Only 24 percent of millennials have basic financial literacy, according to the National Endowment for Financial Education. When it comes to getting their financial house in order, most millennials would prefer not to set foot in that proverbial house in the first place. Getting yourself out of debt and building enough savings to cover your expenses in an emergency is a marathon, not a sprint. Small, incremental changes in your financial habits today can make a big difference in your financial health months or even years from now.
Take these steps today to spruce up your money management process and get yourself on the path to financial health.
* Check your credit score. Before you start the work of realigning your finances, you should check your credit score and review your credit report. It helps to know where you stand financially, and the good news is, even if your credit score is not as high as you’d like it to be, you can take steps to improve it. Establishing a history of on-time payments and maintaining a healthy credit utilization ratio are two things that could improve your credit score quickly. One way to access your credit score without any cost is to find out if your bank or lender offers your VantageScore through their website.
* Knock down your debt. Track down all your accounts — checking, savings, investment, credit cards and other loans — and do the math to find out your net worth. That’s your benchmark to help you track your progress. In the beginning, the truth can hurt, however, knowing how much you have in savings and knowing how much you owe gives you a valuable blueprint for where you need to direct your energy. From there, put together a household budget, and figure out where you can trim expenses, so you can pay ahead on your debts, one account at a time.
* Automate your savings. You’re much more likely to accumulate savings when you make the decision once and let the rest happen automatically. Log onto your bank account and set up an automatic transfer from checking to savings, starting with a small amount, preferably timed with your regular pay day. If you can manage to set aside $85 a month, in a year’s time, you’ll have set aside a full $1,000. That’s a decent emergency fund for things like car repairs and doctor bills.
* Open a retirement account. Here’s another way to automate savings. If you haven’t done so already, start contributing to a retirement plan. Even better, if your employer makes a plan and a match available to employees, sign up as soon as you can. If you can’t afford to contribute the full amount to get the full match, start with a small percentage, and slowly add on.
Taking the first steps to gain control of your finances isn’t easy. Setting up good financial habits today can leave you in a better place tomorrow. Test your credit score knowledge at CreditScoreQuiz.org, and be sure to visit VantageScore Solutions to learn what things influence your score, and what you can do to improve it.
Are today’s senior citizens sufficiently prepared for retirement or have past financial mistakes impeded their progress? What did older Americans wish they knew about managing finances when they were younger? This study from Mike Brown of LendEDU reveals key insights that can help investors of all ages.
For the everyday consumer, getting a grasp on finances can be stressful or even seemingly impossible.
It could take years of balancing a budget and living paycheck-to-paycheck - a crash course of sorts - to full understand the ins-and-outs of personal finance allowing someone to position him or herself for a better financial future.
Unfortunately for some, irresponsible management of finances, such as taking on too much debt or not saving enough, could lead to irreversible damage.
In our latest survey of 1,000 senior citizens, LendEDU sought to uncover how older Americans are faring financially and if they made the right decisions throughout life to live comfortably in their later years.
Are today’s senior citizens sufficiently prepared for retirement or have past financial mistakes impeded their progress? What did older Americans wish they knew about managing finances when they were younger?
Here were a few key takeaways from the study:
Observations & Analysis
More Than Half of Senior Citizens Underprepared for Retirement, Most Wish They Started Saving Sooner!
To gather the data for LendEDU’s story, we surveyed 1,000 Americans, all of whom were at least 65 years of age.
One of the first questions we asked the respondent pool was the following: “What is the biggest financial regret you have from your twenties?”
The plurality of the respondents, 21.4 percent, indicated that the biggest financial regret from their twenties was not saving enough for retirement. Other popular answer choices included spending too much money on nonessential things (17 percent), not investing (12.3 percent), and getting into too much debt (10 percent).
Circling back, it was quite telling that senior citizens regret not saving enough for retirement in their twenties. Getting a jumpstart on retirement is essential to living a comfortable life in one’s later years. Due to compound interest, the earliest possible start to retirement saving will be the most beneficial as your money will have more time to grow.
Professor Timothy Wiedman of Doane University, 66, agreed with most senior citizens who took this survey in that his biggest regret was not getting a jump on retirement while in his twenties.
“I put off starting to save for retirement and didn't open my first IRA until I was a bit over 31 years old. I justified this by telling myself that I could always "catch up" later on my long-term financial plans after establishing a solid career and seeing my income increase,” said Wiedman.
Wiedman soon realized the delay had a substantial impact on his ability to save and earn.
“But the earning power of compound interest is based on time, so an initial delay can have severe consequences. Thus, for young folks these days, opening a Roth IRA as early as possible is vital,” he said. “For example, if a 23-year-old fresh out of college puts $3,000 per year into a Roth IRA that earns a 7.8 percent average annual return, 44 years later at retirement, that $132,000 of invested funds will have grown to $1,009,275. On the other hand, starting the same Roth IRA 20 years later will yield very different results.”
So we know that many older Americans seriously regret not saving for retirement early enough. But were they able to salvage that lost time? Are they prepared for retirement?
The following question was proposed to all 1,000 senior citizen respondents: “As of today, do you believe that you have saved enough for retirement?
The strong majority of older Americans, 54.6 percent, admitted that they do not believe they have saved enough for retirement, while only 26.6 percent think they are on the right track, and 18.8 percent are still unsure.
It came as quite a surprise that so many senior citizens believe they are not aptly prepared for life after work when they should be enjoying warm weather and leisure activities.
But once again, it goes to show the potentially crippling effects of not saving enough for retirement at a younger age. Quite a few senior citizen respondents wished they had saved more in their twenties and that sentiment transferred over to this more black-and-white question.
For reference of what is to come, a LendEDU study found that of 500 millennials who consider themselves to be saving for retirement, 41 percent are using a savings account to save for retirement. A savings account - even a high interest savings account - likely won't produce anywhere near the growth delivered by a 401(k) or individual brokerage account, which 59.4 percent of respondents used.
If those millennials wish to find themselves in a better position than more than half of the baby boomers at the age of retirement, they should probably switch from a savings account to a robo-advisor, 401(k), or brokerage account.
Additionally, when we asked our senior citizen respondents to answer what they know about personal finance today that they had not known at 25, 15.68 percent of the answers were: “I know how to save for retirement.”
The plurality of answers, 28.68 percent, pertained to learning how to live within one’s means, while 25.95 percent of answers were: “I know how to budget.”
Dr. John Story, a 60-year-old college professor at the University of St. Thomas, Houston, summed up this question quite well and further reinforced the importance of getting a jump start on retirement.
“I wish I had known the true cost of debt, and the flipside, the real value of long-term saving.”
With a Lack of Retirement Funds, Many Seniors Relying on Social Security and Life Insurance
As one gets older, there are two components that are thought to be key to achieving a sustained financial comfort. One is life insurance, a product, while the other is Social Security, a benefit.
Life insurance and Social Security benefits become all the more crucial for senior citizens when they have not saved enough for retirement, which is the case for over half of our respondents.
Not surprisingly, many poll participants indicated that they are relying heavily on both things to live their later years comfortably due to a lack of sufficient retirement savings.
In comparison to life insurance, older Americans were more likely to list Social Security benefits as important to their financial strategy. A majority, 69.1 percent, stated that Social Security benefits are a critical component, while 18.7 percent said the opposite, and 12.2 percent were still undecided.
Whereas life insurance must be purchased, Social Security is a benefit that can be qualified for by being of age and by working for a certain number of years (usually 10).
Life insurance is purchased by many senior citizens because it can solidify the financial security of loved ones should the buyer pass away.
While a majority was not achieved, 46.9 percent of senior citizens indicated that life insurance was an important part of their financial strategy. 34.1 percent said that the insurance product does not hold much weight for their financial plan, while 19 percent were unsure.
Considering many of LendEDU’s respondents are not sufficiently prepared for retirement, having life insurance or access to Social Security benefits could become quite pivotal for living comfortably in their later years.
All data within this report derives from an online poll commissioned by LendEDU and conducted online by polling company Pollfish. In total, 1,000 respondents ages 65 and up and residing in the United States were surveyed. These respondents were found via age and location filtering on Pollfish, and then were selected at random from Pollfish’s U.S. user panel of over 100 million. The poll was conducted over a 5-day span, starting on March 26, 2018, and ending on March 30, 2018. Respondents were asked to answer all questions truthfully and to the best of their ability.
Full Survey Results
1. What do you know about personal finance today that you didn't know when you were 25? (Select all that apply)
a. 25.95% of answers were "I know how to budget"
b. 28.68% of answers were "I know how to live within my means"
c. 15.68% of answers were "I know how to save for retirement"
d. 8.57% of answers were "I know how to invest in the stock market"
e. 14.65% of answers were "I understand how consumer credit works"
f. 6.48% of answers were "None of the above"
2. What is the biggest financial regret you have from your twenties?
a. 21.4% of respondents answered "I didn't save enough for retirement"
b. 17% of respondents answered "I spent too much money on nonessential things"
c. 12.3% of respondents answered "I didn't invest my money"
d. 5.5% of respondents answered "I made poor investment decisions"
e. 2.8% of respondents answered "I didn't save enough for my child's education"
f. 10% of respondents answered "I got myself into too much debt"
g. 5.1% of respondents answered "Took a job where I made more money but did not enjoy it"
h. 5.8% of respondents answered "Took a job where I made less money but enjoyed it"
i. 20.1% of respondents answered "None of the above"
3. Is life insurance a critical component of your financial strategy?
a. 46.9% of respondents answered "Yes"
b. 34.1% of respondents answered "No"
c. 19% of respondents answered "Unsure"
4. As of today, do you believe that you have saved enough money for retirement?
a. 26.6% of respondents answered "Yes"
b. 54.6% of respondents answered "No"
c. 18.8% of respondents answered "Unsure"
5. Are Social Security benefits a critical component of your financial strategy?
a. 25.8% of respondents answered "Yes"
b. 29.7% of respondents answered "No"
c. 44.5% of respondents answered "Unsure"
Retirement is waiting just around the corner. People need good advice to help them build their nest eggs before "someday" becomes "now." Here are the best tips, advice and tactics for retirement planning from the top financial advisors in the business.
(BPT) - You're 10 years or less away from retirement. You can clearly see the next phase of your life down the road and it's coming up fast. Are you ready for it? Do you have a comprehensive plan in place so you don't outlive your savings?
If you're not as prepared for retirement as you should be, you're not alone. The Federal Reserve did a study and found that one-fourth of Americans have no retirement savings or pension. And a Money article reports 56 percent of Americans have less than $10,000 saved.
Why aren't more people prepared? There are myriad reasons. Some people are stretched thin. Credit card debt, student loans, rising mortgage and interest rates all conspire to make it difficult for them to save. Others may lack information on the importance of retirement savings, or lack the financial savvy to be comfortable managing their own investments. And then there's the gap between men and women. The Federal Reserve’s study found that among women with any level of education, investment comfort is lower than among similarly educated men.
Yet, retirement is waiting just around the corner. People need good advice to help them build their nest eggs before "someday" becomes "now."
That's why the National Association of Personal Financial Advisors (NAPFA), a national organization representing Fee-Only financial advisors, conducted a poll of its members to get their top tips and advice for people who are nearing retirement. They want to raise consumer awareness about the urgency of preparing for retirement and the importance of having a comprehensive plan in place.
Here are the best tips, advice and tactics for retirement planning from the top financial advisors in the business.
1. Make a list of retirement “needs” and “wants.” If you do not have enough savings for all of your “needs,” make a ten-year plan to increase your funds.
2. Take a hard look at any major debts you have and develop a plan to eliminate them.
3. Brainstorm any “big ticket” financial commitments (caretaking for a family member, etc.) for the next 10 years and consider how these items might affect your ability to save for retirement.
4. Continually monitor and analyze your asset allocation to make sure it is the right one for you. Understand whether you should move to a more conservative asset allocation or continue investing for growth.
5. Be tax efficient with your investments. For example, you should defer as much of your salary as you can to your defined contribution plans.
6. Save to an emergency fund and stay aware of your company’s financial situation. Companies are prone to reorganizations and layoffs, and older workers can be vulnerable.
7. Ask your HR department about the relationship between your current health insurance and Medicare, as well as what your options are when you reach age 65. Get information about any pension or defined contribution options and any other retiree benefits.
8. Research when stock-based compensation might expire and what stock awards you can retain after retirement.
9. Double check your reported Social Security earnings and resolve any discrepancies now. Explore your Social Security claiming options and make sure you understand the timing of applying for benefits.
10. Make sure that all of your estate documents are up-to-date. Verify that your named executors and proxies know your wishes and are willing to act on them if needed.
If you think you’ll need help creating and sticking to a financial plan, NAPFA recommends working with a Fee-Only financial advisor who adheres to a strict fiduciary standard. These advisors are required to put your best interest first and don’t accept commissions on the products they recommend, which reduces potential conflicts of interest. For more information and resources on retirement planning, check out NAPFA’s infographic about the poll. To find a Fee-Only financial advisor in your area, visit the NAPFA website at www.napfa.org and NAPFA’s “Find an Advisor” search engine.
The bottom line is that protected retirement income can help provide much-needed peace of mind for many Americans.
(BPT) - How big is your retirement nest egg? Is there a chance you could outlive it? Even if you're socking money into your 401(k) every paycheck like clockwork, that's a question worth pondering.
Americans are living longer, more active, younger lives. They say that 60 is the new 40, and if you look around at who we used to call "senior citizens," you'll see people in their prime. That's the good news.
It also presents a problem. We're all facing a silent, growing crisis. Study after study, including financial research organization LIMRA’s 2016 Secure Retirement Study, shows that many Americans underestimate their retirement expenses. Today, retirement isn't the end of your life, it's a transition point. It's about enjoying the fruits of your labors without the stress of your 9-to-5. Will you have enough money to do that for the rest of your life?
Kent Sluyter, president of Prudential Annuities, says the first step toward achieving that goal is to change your mindset. We're all programmed to think about retirement savings, contributing to that 401(k) and accumulating wealth month after month and year after year. That's important, no doubt, but it's only one part of the retirement puzzle. It's also about generating regular income during retirement, so you're not simply depleting your accumulated retirement savings with nothing coming in to replenish the pot.
One way to get a regular "paycheck" during retirement, Sluyter says, is with annuities. But they're not top of mind for many people, and misinformation and confusion is floating around out there, even in financial advisors' offices.
"The annuities market is at an inflection point," says Sluyter. "Annuities are passed over by many consumers and investors because they are often perceived as expensive and unnecessary."
Annuity sales fell 8 percent in 2017, according to LIMRA data. Observers attribute much of the drop to the Department of Labor’s Fiduciary Rule that governs the way financial professionals sell and market annuities. The rule made it less attractive for many to sell annuities and created a great deal of media coverage that amplified existing negative perceptions of them. Annuities have a reputation of being complex, which only increases the risk of their being misunderstood. However, annuities can serve a critical purpose within a retirement portfolio among a combination of strategies, investments and products.
That’s why several companies, including Prudential, recently established the Alliance for Lifetime Income with the goal of promoting greater understanding of how annuities can protect retirement income and help grow retirement savings.
“Through the Alliance, we’re fostering clarity and simplicity, so consumers have confidence in lifetime income solutions such as annuities," says Sluyter.
What are annuities, exactly, and how do they differ from other retirement savings? Here's a short course in Annuity 101.
An annuity is an insurance product that guarantees income. Just like an insurance policy, you pay into it, often in a lump sum, and it guarantees you monthly, quarterly or yearly payouts for the rest of your life. There are three different types:
Why are more consumers investing in annuities? Sluyter explains:
The bottom line is that protected retirement income can help provide much-needed peace of mind for many Americans.
Annuities are issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (in New York, by Pruco Life Insurance Company of New Jersey), located in Newark, NJ (main office), or by Prudential Annuities Life Assurance Corporation located in Shelton, CT. (main office). Variable annuities are distributed by Prudential Annuities Distributors, Inc., Shelton, CT. All are Prudential Financial companies and each is solely responsible for its own financial condition and contractual obligations.
(BPT) - With the Tax Cuts and Jobs Act of 2017 having been signed into law, here are some of the things you should be thinking about as tax season approaches, according to Robert Fishbein, vice president and corporate counsel, Prudential Financial Inc.
2017 tax returns
The new tax law is generally effective starting in 2018, which means that your 2017 income tax return is largely unaffected. However, there may be actions you can take now to benefit from the change. For example, assuming you are eligible, you could fund a traditional IRA before the due date of your tax return; the income exclusion may be more valuable under higher 2017 tax rates.
Lower tax rates and new withholding
The hallmark of the new tax law is lower marginal tax rates for individuals. The IRS has issued withholding tables employers started using in February to reflect these lower rates. While this could mean lower tax withholding and more take-home pay, you should evaluate your personal income tax position to determine if you will pay more or less under the new law and adjust your withholding accordingly.
If you make estimated tax payments, you should also estimate your tax liability under the new tax law and make necessary adjustments to your quarterly tax payments.
Assuming your withholding or estimated tax payments need no adjustment may create an unpleasant surprise if you are under-withheld and owe penalty tax and interest when you file your 2018 income tax return.
Higher standard deduction
The new higher standard deduction of $12,000 for individuals and $24,000 for married couples will greatly reduce the number of taxpayers that itemize deductions. If you did not itemize in 2016, and your tax position is similar now, you will probably not itemize in 2017. The increased standard deduction, combined with lower marginal rates, may mean your tax liability will go down.
If you itemized in 2016, compare your total itemized amount to the new standard deduction. If less, and assuming a similar tax position in 2017, you will likely no longer need to itemize.
For many, this provision will turn out to be the greatest simplification aspect of the new tax law, since they no longer must track itemized deductions or complete multiple associated forms.
No personal exemptions
Some taxpayers will need to look more closely to determine if they will pay less or even more. The new law eliminates personal exemptions and reduces deductible items, such as limiting the total deduction for state and local income taxes to $10,000, reducing the amount of deductible mortgage interest and eliminating the deduction for interest paid on a home equity line of credit. Therefore, if you itemized deductions in 2017 and your deductions were greater than the applicable standard deduction, you will have to consider what deductions are available in 2018 and estimate your tax liability.
In states with higher income taxes and property taxes, it is possible that the loss of itemized deductions will be greater than the benefit of lower rates and your tax liability could increase.
Increased child and dependent credits
The new law increases the child tax credit for children under 17 to $2,000. The income limits to phase out the credit are also significantly increased so more taxpayers will be eligible. In addition, there is a $500 credit for other qualifying dependents. Depending on your tax bracket, this could be better or worse than getting an exemption for each dependent.
Increased AMT exemption
Adding one more layer of complexity to your 2018 planning is the new tax law’s modification of the Alternative Minimum Tax or AMT. The AMT is a parallel tax system that requires you to calculate your income tax under the normal rules and then again under AMT rules, paying the higher of the two. The new tax law increases the AMT exemption, or the amount you can earn and not be subject to this alternative tax. If you have been subject to AMT in the past, you should review the new increased exemption and whether that will change.
The bottom line
The bottom line for most is whether they will pay more or less income tax in 2018 than in 2017. While it is likely many will pay less, you need to consider all the above before you know how you will be impacted by the new tax law.
Please consult your legal or tax advisor concerning your particular circumstances. The Prudential Insurance Company of America, Newark NJ and its affiliates.
(BPT) - It's happened to almost everyone: you leave a job and have a retirement account that you are no longer actively contributing to. It sits there for months — maybe years — because you're not sure exactly where to move it or what the process is like to roll it over. You know that money could probably be better invested, but moving accounts is intimidating, so it sits.
"It's common for people to be nervous about transferring retirement accounts like IRAs and 401(k)s," says Nick Holeman, a financial planning expert at Betterment.com. "Moving accounts shouldn't be something you fear or put off because you think it's too complicated."
Holeman says three main causes for concern are potential taxes, excessive fees and process complexity. However, these concerns are often based on misconceptions, and he wants to set the record straight to empower investors to take control of rogue retirement accounts.
Many people worry about potential tax concerns when moving retirement accounts. They've heard about the high penalties for early withdrawal and figure the best way to avoid them is to let the account be.
"A rollover is not equivalent to a withdrawal," says Holeman. "When you transfer retirement accounts through the appropriate processes, you're still keeping it in the same categorization. It just now lives in a different place."
A rollover can also help facilitate better control of your money. For example, if you roll over an old 401(k) into an IRA account, you are no longer limited to the investment options selected by your employer. This freedom of choice can help you make more customized investment decisions based on your personal goals. Of course, it's important to remember that investing in securities always involves risk and there is the potential to lose money.
A rollover means closing an old account and opening a new account. This process can incur fees that will be unique to each provider. Many people worry about the potential cost, which causes them to leave accounts untouched.
"Research account closing fees but be sure to keep in mind the big picture," Holeman says. "It's like ripping off a bandage. For example, a one-time $20 closing fee is better than a $100 annual fee that could be reduced when you move your account."
Holeman's advice: always know what fees you're paying. Before selecting a new financial organization for your retirement savings, research fees and consider selecting a new account with no trading costs, commission fees, or rebalancing fees. For example, Betterment’s Digital plan charges just 0.25 percent per year and that covers goal-based financial advice, tax-efficient investing, automatic rebalancing, and other smart features that help you keep more of your money.
"People tend to treat rolling over a retirement account like going to the dentist," Holeman says. "It's important but usually not urgent, so people tend to put it off."
What's more, people are intimidated by all the paperwork, lengthy forms and seemingly complex steps, so they delay rollovers. Holeman says moving accounts is typically easier than most people think, and in fact, after the process is complete, many people regret not doing it sooner.
"Often, moving retirement accounts can be done completely online thanks to advanced technology," says Holeman. "Betterment offers a '60 second rollover' for certain accounts from supported companies, and there's someone available to help should you have any questions. Moving accounts is typically easier than people imagine."
You should carefully consider whether a rollover is right for your own personal situation, including the specific fees and services associated with your 401(k). Visit betterment.com/rollover to learn more about factors you should consider when deciding whether a rollover might be right for you.
Betterment LLC distributed this article through Brandpoint.
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