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Archive for the ‘Financial Planning’ Category

Three Thoughts on Annuities That May Work for You

Annuities are complex and usually poorly understand. Let’s dig deeper into what an annuity is, what it isn’t, and strategies you may want to consider.

Let’s begin with Investopedia.com. If you haven’t heard of this site before, it is worth bookmarking. It offers fantastic information on finance including definitions. In fact, their definition for an annuity is solid.

They describe it as being:

“An annuity is a contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.”

If you understood this definition, then you’re probably on board with the idea of raising cash and then developing a stream of revenue to support your retirement.

Put simply: Annuities allow individuals the ability savings that are tax deferred. They can also help to protect what you’ve already saved. And They can generate a steady stream of income in retirement.

If you can do this with a secure method then it’s well worth your time. The challenge is that not all annuities are created equally so it is important that you get good advice from your financial advisor before diving headlong into an annuity.

Which brings up these alternative strategies…

Delay Social Security

Ok, so Social Security isn’t an annuity per se. But postponing the time when you take Social Security is just like purchasing an inflation-adjusted cash flow that you can draw on just a few years later than you’re expecting. To give you an idea of what this is, it’s simply a U.S. federal government annuity. If you delay social security from age 66 to age 70, your month-to-month advantage is going to be an increased payment of up to 32%. That 32% also has a yearly price of living modification so that will also increase with time. In one example, delaying social security for four years would raise a person’s payment by $987 each month. In order to have the extra money, you would have had to pay $126,000 into retirement funds over those four years. However, if you’re interested in getting an inflation-adjusted higher monthly payment, starting in four years would set you back about $235,500 today for a 66-year old person. In short, this means that this government annuity was priced at 46% less than you could get on a competitive market.

Employer Pensions

Many people have a pension plan that they can start receiving at retirement. Many public or government employees have a pension plan option. Some businesses still offer pensions as well. Usually, at retirement age, you’ll have the choice to either take a lump-sum repayment which can be rolled over into an IRA or take a month-to-month repayment. (Typically with survivor benefits.) In most cases, the repayments are insured by the Pension Benefit Assurance Corporation. Contrasting the lump-sum settlement to the monthly repayment, the pension plan annuity payment is usually the best option 75% of the time.

TIAA Traditional Annuity

Today, over 3.7 million people who work at non-profit companies have their retirement accounts at TIAA. One of the alternatives to purchase is known as the TIAA Traditional Annuity. Many of these participants have access to a guaranteed 3% annual growth that will provide them with either a lump-sum payment or an income stream on retirement that is actually available with competitive rates. In reality, rates over the past year have been more than the 3% guarantee. With money-market funds and CDs paying so little, it’s actually often a good alternative for folks today.

Regardless of the options you choose, the best place to begin is to have a chat with someone on our team to help you understand your options, put you in touch with the best information and resources available, and help you make certain you are making sound decisions for your future.

Does Shopping At a Warehouse Save Money?

It is a very common misconception that making a purchase at a wholesale club warehouse like BJ’s, Sam’s Club, or Costco will help you to save plenty of money. It is easy to get excited when you hear that making purchases in bulk will help you save. But the truth is sometimes savings fail to materialize.

It’s certainly true that you’ll find much lower prices on certain items at a warehouse club when comparison shopping at a grocery store. In fact, the United States Department of Agriculture · Economic Research Service has recorded prices are truly lower in such warehouse stores for specific items. Club prices are lower by 12% for meat, 11% for milk & milk based products, and 6% for grains. This is based on analyzing 40,000 data points collected from 52 regional markets.

So yes, shopping at warehouses can offer true savings. But there is a “buyer beware” aspect that can diminish or eliminate those savings altogether.

Location of the store

Warehouse clubs often have lower costs in large metropolitan areas or in more isolated areas when compared with supermarkets. However, the savings are typically lower in areas where grocery stores have lots of regular competition.

For example, clubs have lower prices in the Baltimore-Washington area for about 90 percent of their products. But outside of San Antonio, clubs offered savings on just 55% of the products they sold.

Subscription costs

Almost all storage warehouses have a fixed subscription charge for allowing you to shop or even visit the club. The usual subscription charges are around $45-$50. Hence, you may have to make a lot of purchases to justify the subscription charges through the savings you are able to make in the stores.

NOTE: Some clubs like Costco have “Executive” memberships that cost a little more but that offer rebates on purchases. Many Costco Executive members claim to have earned enough rebates to cover their Costco membership costs.

Impulsive shopping results in bigger costs

Although the prices at clubs can be great, shopping often requires discipline. Clubs are designed to get you to make unplanned purchases that range from new food items they are sampling to new appliances, home electronics, and furniture.

Grocery stores don’t sell such items and rarely offer samples. As a result, it is much easier to remain on target with a shopping list in a grocery store vs. a club.

Buying in bulk may not offer savings

Let’s say you buy a giant bag of baby carrots at the warehouse and let’s say they are about 15% less than at the grocery store. But then time marches on and you only consume half of the bag before it spoils. How much have you really saved?

Food spoilage is one of the biggest problems with shopping for meats, dairy items, fresh fruit, and fresh vegetables at a warehouse. While these are the areas that offer the largest savings, many smaller households fail to consume the food before it goes bad.

So, how do you go about trying to save money through such clubs? Here are a few suggestions.

Pay attention to sales at grocery stores for items you purchase at a warehouse club. You may find sale items at the grocery store give you much better value than regular priced items at the warehouse.

Always comparison shop. You may find that the grocery store offers the same or lower “everyday” price on items than the warehouse… without the need to buy in bulk.

A freezer is your friend. To help avoid spoilage be sure to put meats, cheeses, and breads in the freezer until you are ready to consume them. Refrigerating bread can also help it last longer.

Don’t throw things away just because the date on the package has passed. The use by dates are notoriously inaccurate. (Link to this study: http://www.reuters.com/article/us-usa-foodsafety-dates-idUSBRE98H15F20130918) Per researchers, printed dates have little to do with actual shelf life. Just because the food has expired doesn’t mean you’ll get sick if you eat it. A common-sense rule is better… if the food smells bad, looks rotten, or tastes off, you should throw it away. Otherwise, you are safe to consume it even if the date has passed.

The bottom line: being a smart consumer is the best way to save, regardless of where you shop.

(Be sure to reach out to us for other money saving tips. Our team of advisors is here to help you get the most out of each dollar you earn.

When to Invest

When it comes to investing, timing seems to be everything. But many investors overlook quantity of time vs. the quality of the time. Indeed, if you’re interested in securities, you know that getting the timing right makes for a constant challenge.

We’re currently entering the ninth year of the bull stock market and new clients still ask when they need to invest. They always want to know if the time is right or if they should wait for the market to decline. They also ask if they should buy their stocks all at once or over an extended period of time.

What’s the right answer to these questions? It depends.

For example, a key strategy for Warren Buffett is to buy the fear and to sell the greed. He famously invested in Goldman Sachs and Bank of America at the height of the fear driven sell-off during the Great Recession. Mr. Buffett is not a “trader” and prefers to hold on to his investments during “difficult times”. He does this because he believes so strongly in those stock’s fundamentals.

Keep in mind that no one can know how equities are going to do in the future. Indeed many small investors waiting for a huge pullback will likely never enter the marketplace. This is because it takes nerves of steel to invest when the market is going down.

Indeed, when stocks fell by about 20% from their highest level, many investors chose to remain on the sidelines. Why? Clients have said they were worried there would be an even larger decline. Unfortunately, that 20% decrease was the lowest and then the market began to recover, causing them to lose out on easy profits for the next few years.

Today, there are other reasons why investors hold off on entering the market. They may be fearful due to current politics or because of what may occur with with North Korea. Even when those situations are stable though, new crisis and uncertainties will continue to emerge. Skittish investors who lack a long-term horizon will always find an excuse to stay sidelined.

Indeed, if you’re trying to find the best time to enter the market, then you’re likely playing a losing game. If it’s risk that you’re trying to stay clear of, then leaving your money in cash is probably even riskier because it’ll lose value due to inflation. Stocks are still one of the best options to earn a return that’s greater than the cost of living.

When they’re finally ready to invest, folks want to know if they should invest all at once or over time using dollar cost averaging or similar techniques.

Dollar Cost Averaging (DCA) has been the staple of a buy and hold strategy for a long time yet it is still new for individuals who lack investing experience… so it is worth understanding.

With DCA, an investor purchases a certain amount of an equity over a period of time. For example they may invest $500 a month each month on the same day of the month over the course of several years.

The result is that when the equity goes down in value you are able to purchase more of it. When the equity goes up in value, you are able to purchase less of it. But over time you’ll have increased your portfolio size at varying prices… in effect sometimes picking up more of the equity at a “discount”.

Dollar Cost Averaging is also easier to manage from a psychological perspective… consistent amounts over an extended period of time is easier for most folks to handle than investing a giant lump sum.

But be mindful that DCA is part of a longer buy and hold strategy. It doesn’t eliminate risk… A registered investment advisor or Certified Financial Planner can offer more insights into how best to handle risk management.

Key Recommendations:

* Only consider investing after talking with professionals and having a complete understanding of your overall long-term strategy.

* Be sure you diversify your portfolio.

* Talk with your advisor about strategic re-balancing of your assets and how this can help reduce risk.

Check out Life Insurance too…

Talk with your insurance advisor about how certain Life Insurance products may also help you with your long-term strategy.

Some innovative Life Insurance solutions offer stock-like participation and value appreciation while also giving your loved ones added protection should something terrible happen to you.

As always, if you have any questions about preparing for the future while protecting those you love, please reach out. We’re here to help.

How to Avoid Impulse Buying

When it feels like a bargain, do yourself and your budget a support: Wait before you buy

” It seemed like a smart idea at the time.”

That’s what my friend Clive Jenkins claimed as we stood watching his new hot tub being supplied to his residence.

” Yep, we adopted some hotdogs, and we brought out a jacuzzi rather,” Clive said, stating the ill-fated purchasing trip to a local subscription discount store that cost nearly $7,000 more than he and his other half had actually planned.

” And also you recognize just what, Jeff? We even neglected to acquire the hot dogs,” Clive claimed. “I informed my spouse, we can’t pay for to return there to obtain them.”

Obviously, Clive isn’t the only individual to buy something he hadn’t intended on, only to regret it later on. As Clive discovered, when buying at supposed big-box stores, you run the added danger of supersizing your impulse acquisitions. But also at normal grocery stores, virtually 60 percent of all purchases are unplanned, impulse acquisitions, inning accordance with a joint study by faculty at the College of California and also the University of Wisconsin.

Below are 12 ways to take control of your costs and also limited impulse acquisitions:

Comply with a Compulsory Waiting Period: Along with the Golden Rule– always make a wish list before you go out to the shop and also stay with it– attempt establishing a “obligatory waiting duration.” Wait at least a week after you see a thing in the store. In an informal experiment I’ve been conducting with my cheapskate pals, most people that attempt this say that over half of the time they never ever go back to acquire the item after the weeklong ceasefire agreement, as well as when they do return to the shop with the objective of buying it, when they see the product once again they often decide they no longer desire it.

Edit Your Junk Mail: There’s a great reason that all of us obtain so much spam on a daily basis: specifically, since so many people buy things as a result of obtaining it. Practically necessarily, items purchased as a result of receiving spam are impulse acquisitions, because the promotions get here unrequested, not as a result of us requesting them. The nonprofit organization 41pounds. org could aid you obtain your name off junk newsletter. (By the way, 41 extra pounds is the ordinary amount of spam every American grown-up gets annually!).

Tidy Something: “Whenever among my kids [young adults] intends to acquire something brand-new, I tell them to first go and also clean something they currently own.” That’s the advice of one of my Miser Advisers, that states that when you make the effort to spruce up something you currently possess– a pair of shoes, an old fishing rod, that bike in the garage, even your car– you develop a brand-new recognition for all right stuff you currently have.

Only Fools Enter: Particularly when it comes to acquiring the current high-tech gizmos, you’re clever to bear in mind the lyrics to that popular Elvis Presley tune and resist on rushing out to the shop. A lot of brand-new technology typically lowers in cost after it is at first launched and also need increases. And also, later variations are likely to have fewer pests and much better capacities.

Make a “Just what the Hell Was I Believing?” Checklist: Take a look at this post on doing a once-a-year “Just what the hell was I assuming?” audit of your optional investing. Utilize the “audit” to gather a list of things you purchased on an impulse as well as later regretted. Gain from your mistakes and carry the listing with you as a painful pointer whenever you shop.

Pay Cash: Many research studies have actually shown that when people pay in cash rather than making use of a bank card, they tend to invest much less, partly since psychologically it’s harder for us to get rid of cold hard cash. A Bankrate.com research showed that individuals that make use of credit card at fast-food restaurants invest in average 50 percent more than individuals who pay with cash money. That’s bad for not only your wallet yet likewise your waistline, as well.

Avoid the Web of Temptation: Shopping over the Internet has actually taken impulse purchasing to a whole new level. Inning accordance with a research by the research and also consulting firm Interface Engineering, impulse purchases make up practically 40 percent of all the money invested in shopping sites. Right here’s a straightforward suggestion from the same study in order to help you stay clear of impulse purchases when you shop online: When you’re searching for a product you know you want to acquire on an ecommerce website, don’t browse by category (e.g., “electronics”); instead, look for the particular product (e.g., “DVD gamer”). “The study revealed that consumers who browsed by group were 3 times more likely to get averted as well as acquire something in addition to just what they set out to get.

Declutter Prior to You Buy: Pressure yourself to get rid of– or better yet distribute– one item you currently own before you enable on your own to acquire something new. Not just will this assist you declutter your life, yet you’ll possibly find that when you need to part with an ownership initially, it will remind you what does it cost? you currently possess.

Store Less Typically: Sounds straightforward sufficient. The regularly you shop, as well as the even more time you spend purchasing, the more likely you are to impulse-buy. As an example, the typical American family shops for groceries 3 to four times every week. The tightwads I evaluated for my newest book, The Skinflint Next Door, purchase groceries no more than once a week– as well as in some cases as infrequently as when a month. Typically, the scrooges invested nearly 40 percent much less on groceries than regular Americans. Go figure.

If You Slip, Conserve the Slip: If you get something you didn’t strategy to get, make sure you hold on to your sales invoices. Often, impulse acquisitions lead to purchaser’s remorse. A growing number of retailers have actually taken on a “no doubt asked” plan when it comes to clients returning or exchanging purchases within a specified duration. They want to maintain you delighted, and also maintain you as a future consumer. However do not overdo the returns or use an item prior to you bring it back to the store. Many shops currently use a computerized database to punish supposed serial returners, people who blatantly abuse the system and also sometimes also commit scams by returning used or replaced items instead.

Rediscover Layaway: Good antique layaway plans are rebounding at many sellers. For a tiny down payment (occasionally refundable, sometimes not), the store sets aside an item until you return with the equilibrium of the settlement. It provides you a cooling-off period to earn sure you truly desire an item, as well as– with any luck– forces you conserve up the cash for the remainder due, instead of putting it on a credit card. As my terrific auntie constantly claimed, “I ‘d rather place it on layaway compared to lay awake at night bothering with exactly how I’m mosting likely to pay it off on a credit card.” An asset, even if not grammatically right!

Assign a Designated Cheapskate: “If you’re mosting likely to shop with pals, please shop responsibly as well as constantly appoint an assigned skinflint.” That’s the slogan for my brand-new Cheapskates Against Impulse Buying project. Seriously, impulse buying is fueled by a crowd attitude when you go shopping as a group, so ask a member of your shopping party to avoid costs and to test those crazy purchases. You know, the Designated Penny pincher can drop subtle hints such as asking, “Did you repay your bank card last month?” or “So, just how’s your 401( k) looking nowadays?”.

Protecting Your Passwords is Financially Critical

Think about a computer system password as being a front door to your wide range and also secrets. It can be made from flimsy wood or as impervious as a titanium bank vault. Here’s how you can finest secure your citadel.

Usage passphrases

Cyberpunks utilize advanced software application that can run countless combinations of letters and also signs quickly. Your protection: longer passwords. Former hacker Kevin Mitnick advises 20 characters or longer. The method: Utilize a sentence or phrase you develop, such as “My Auntie Sylvia has actually loved me given that I was a kid.” It’s ultra-hard to hack however very easy to keep in mind. For a lot more protection, add a number or sign at the end, together with an uppercase or two.

Include a 2nd door

Two-factor verification services include an added layer of safety to your most crucial digital accounts. You log in to an account using your typical password. Next off, the two-factor verification site sends your phone a six-digit code that you need to get in before getting. For a listing of web sites that offer two-factor authentication, go to twofactorauth.org.

Subscribe to the AARP Cash Newsletter for a lot more on rip-offs and also customer defense

Maintain your passwords in a vault

Never ever keep passwords in a file on your computer system. Rather, utilize password supervisor apps that save passwords in a well-protected digital space. All you need is a master password to access the checklist. Popular variations that utilize cloud modern technology consist of LastPass, Dashlane and 1Password. Applications that place the vault on your disk drive include RoboForm, Password Safe or KeePass.

Revitalize consistently

Yearly, change the passwords on all your essential accounts. With hackers swiping information on millions of accounts at a time, this will certainly aid keep you safeguarded if their focus turns toward you. Likewise alter your password if you’re informed by a web site that its safety and security has actually been breached.

Vary your passwords

That’s the golden rule, cybersecurity specialists say: Why allow one key unlock every one of your digital doors?

Watch Out for Rip-offs When You Move

Moving is stressful! Whether you are moving across town or across the U.S., it’s a huge undertaking. You hire movers to help relieve stress, but it can actually cause problems. In fact complaints about moving companies have climbed by more than 25 percent in recent years.

For example, in 2014 there were more than 800,000 interstate moves. Of those, 3,600 resulted in complaints. So how do you avoid issues with movers and potential scams?

First off, watch out for low bids. One of the biggest complaints stem from movers that quote one price and then hold your items hostage, compelling you to pay a higher rate. Low quality movers will also give you a bid without inspecting your items. They will often say they’ll give you a final bid once your items are loaded on the truck. Avoid these!

Movers that leverage these tactics tend to be unlicensed and often advertise in classifieds or on Craigslist. A better resource is to check moving.org for more reputable movers. If you are looking for a better way to save, set your move dates carefully. Summer months are the busiest… and end of month moves tend to be more expensive than mid-month moves.

Second, look for clues that indicate you are likely dealing with a reputable company…

  • They’ll answer the phone with their actual company name. Less reputable movers will answer with “moving companies” because they are trying to avoid answering calls from dissatisfied clients.
  • Their website is modern and well branded. It also states their physical address that is tied to a real office. Less reputable movers will have a “virtual” office and their mailing address will be a P.O. Box.
  • They offer absolute clarity on their insurance coverage.Less reputable companies won’t.
  • They clearly show their licensing. Less reputable firms may not have licensing at all.

The key: Expert movers demonstrate clear professionalism throughout the process.

Third, protect yourself from ID theft. You would take extra care to protect expensive jewelry and family heirlooms, right? You also need to protect your personal records! Any paperwork that contains personal identifiable information should be secured to protect it. Important documents to protect include:

  • insurance documents,
  • stock certificates,
  • wills,
  • passports,
  • social security cards, and
  • birth certificates…

Fourth, read your contract carefully. If you don’t understand the terms, be sure they are explained to you. Keep copies of everything you authorize, particularly the “bill of lading”. (This recognizes the mover is in possession of your items… it also serves as your receipt.) Be particularly careful with moving insurance. Often times the standard insurance is minimal and won’t offer true “replacement-value” coverage. (Be sure to check with your insurance agent to see how your home owners policy may cover items that are lost or damaged during a move.)

By following these tips and leaning on your insurance agent for guidance, you’ll be well positioned to have a low-stress move.

6 out of 10 adults don’t have a will. Do you?

We’re all mortal. We know that we’ll have to face that fact… someday…

But planning for our life’s end is difficult to grapple with. It’s why so many of us haven’t taken the time to craft a will or trust.

(One fine point… as folks age, they tend to be more likely to have a will… 81% of individuals 72 or older tend to have some form of estate planning in place.)

There’s an issue with this. Putting off a will puts loved ones at risk, especially if they have children that will need care. With as many as 78% of individuals with young kids not having some form of estate planning in place, this is a frightening proposition.

Interestingly, individuals appear to be a bit more proactive about establishing power of attorney for health care decisions. (This is important if you become incapacitated and need someone to make decisions on your behalf.)

So what’s the biggest reason individuals haven’t created a will? According to surveys, it is simply because they “haven’t gotten around to it”. It seems that while folks recognize it is important to have a will, they are resistant to take action. (The same reasoning applies to people putting off establishing a healthcare power of attorney.)

So if you’re like most Americans you don’t have a will… But you can do something about it. There are many options including getting professional advice or using software and services to help you create one on your own. (Nolo.com is a popular resource for “do it yourself” legal solutions.) One thing… be careful with creating your own will. If you fear family members may challenge your will, having one professionally crafted is a good choice.

And while you are thinking about how to protect others with a will, you may also want to consider life insurance. Be sure to talk with you insurance professional. They can offer you great advice… and they’ll show you how flexible life insurance can be.

What’s a Safe Investment That Protects Against Inflation?

It appears inflation may be on the rise. Certainly the Federal Open Market Committee seems to think so. This is why it continues to incrementally increase interest rates. Further evidence includes an increase in the Consumer Price Index, rising wages, and a tightening labor market.

So what sort of investments might one consider with rising inflation and a stock market at (or near) all-time highs? Bonds… specifically Treasure Inflation-Protected Securities (also known as TIPS).

Most bonds pay out a set interest rate. TIPS on the other hand have some of their repayments linked to the government’s Consumer Price Index. So as inflation rises, you can earn more.

TIPS also behave differently than most bonds from a tax point of view. This means it is important that you understand how they may impact your tax situation.

TIPS are also more volatile than “normal” bonds, so they should be a part of a long-term strategy. Otherwise fluctuations over shorter periods of time may be nerve-racking.

A different choice would be to consider I Bonds. (Also known as Series I Savings Bonds.) These are offered by the U.S. Treasure and are connected to rising costs of living. I Bonds protect against inflation over time and are guaranteed to not lose value during deflationary periods.

You can learn more about I Bonds by clicking here.

Of course, it’s best to have a conversation with your financial adviser to determine the appropriateness of each option based on your current financial situation and your long term goals.

Watch Out For These 5 Tax Traps

Watch Out For These 5 Tax Traps

Many folks are already working to file their taxes… especially if they have refunds due. But nearly 60% of taxpayers worry quite a bit about their taxes.

  • Worry about what they might owe the IRS.
  • Worry about completing the paperwork properly.
  • Worry about a potential IRS audit.

So, we’ve put together these 5 tips to help calm fears and make certain your taxes are as stress-free as possible.
Mistake #1 – Skip Filing Taxes

 

Many individuals mistakenly think they don’t need to file if they don’t have a paycheck. This is especially true for seniors. Small business owners may make this mistake too – particularly if they haven’t been making estimated tax payments. Regardless, it is never a good idea to skip filing. Failure to file penalties can be excessive – 5% of overdue taxes for each month the return is late.
If you have a reason why you can’t file on time, simply file for an automatic six-month extension for the IRS by filing Form 4868. In many cases, this will protect you from getting hit with late-filing fees.

 

And it is important to note that filing for an extension doesn’t give you more time to pay your taxes. If you owe, estimate that amount and be sure it is paid by the filing due date.
Mistake #2 – Social Security
Many seniors assume their Social Security benefits aren’t taxable. That isn’t always true. In certain situations Social Security earnings can be taxed if you are married and your income is above $44,000. They can also be taxed if you are single and your earnings are greater than $34,000.
As much as 85% of your Social Security income can be taxed depending on how far above the thresholds your actual income is.
This is where talking with a professional is important. For example, some believe if income is from tax-exempt interest like from municipal bonds, they don’t have to worry about how it influences the taxation of Social Security benefits. This would be a mistake.
Mistake #3 –  Required Minimum Distributions
If you have money in an IRA or 401(k), you need to begin taking required minimum distributions (RMDs) after you turn age 70 1/2. If you fail to do so, you risk a 50% penalty on what you should have withdrawn.
Financial organizations that administrate these plans have a requirement to advise you on your RMD. However, the responsibility to take the distribution resides with you.
If you’ve discovered you’ve made a mistake in taking your distribution, you need to correct that right away. Showing that you recognize the error and have taken action to correct it will help with the potential of having the IRS waive fees.
Also, if you don’t plan your required minimum distributions carefully, you could end up bumping yourself into a higher tax bracket. Again, this is where talking with a qualified financial advisor is critical to find the most tax-advantaged ways of dealing with RMDs.

  1. Some Bonds Get Taxed

Bonds are a popular option for folks in or nearing retirement. But it’s a mistake to believe that all bonds are tax-free. Some local bonds carry tax risk.
For example, some municipalities issue bonds for constructing things like sports arenas. These are called “private activity bonds”. If you face the alternative minimum tax or AMT, the interest from these types of bonds must be included in AMT calculations.
As a result, you could face a 28% federal income tax on that bond income.

 

The AMT was created years ago to prevent abuse from wealthy individuals claiming too many deductions. However, the tax itself hasn’t been indexed to inflation. That means that many middle-income taxpayers are now trapped paying AMT… so be very careful about this.

 

  1. Gifts

 

It’s popular for folks in retirement to distribute assets as gifts to their children and grandchildren. The thinking is this helps to minimize the size of the estate and potential probate taxes. Given that folks with assets of more than $5.45 million face Federal estate taxes a high as 40% it’s understandable why people want to avoid this.
You can give gifts up to certain thresholds after which if you give away more than the threshold you have to report the gift to the IRS.
Many people fail to make these filings because they misunderstand federal rules governing estates and gifts. It’s wise to talk with someone that knows about taxation to make sure you have a clear strategy for wealth distribution from your estate while you are still alive.

Watch Out For These 5 Tax Traps

Many folks are already working to file their taxes… especially if they have refunds due. But nearly 60% of taxpayers worry quite a bit about their taxes.

  • Worry about what they might owe the IRS.
  • Worry about completing the paperwork properly.
  • Worry about a potential IRS audit.

So, we’ve put together these 5 tips to help calm fears and make certain your taxes are as stress-free as possible.
Mistake #1 – Skip Filing Taxes

 

Many individuals mistakenly think they don’t need to file if they don’t have a paycheck. This is especially true for seniors. Small business owners may make this mistake too – particularly if they haven’t been making estimated tax payments. Regardless, it is never a good idea to skip filing. Failure to file penalties can be excessive – 5% of overdue taxes for each month the return is late.
If you have a reason why you can’t file on time, simply file for an automatic six-month extension for the IRS by filing Form 4868. In many cases, this will protect you from getting hit with late-filing fees.

 

And it is important to note that filing for an extension doesn’t give you more time to pay your taxes. If you owe, estimate that amount and be sure it is paid by the filing due date.
Mistake #2 – Social Security
Many seniors assume their Social Security benefits aren’t taxable. That isn’t always true. In certain situations Social Security earnings can be taxed if you are married and your income is above $44,000. They can also be taxed if you are single and your earnings are greater than $34,000.
As much as 85% of your Social Security income can be taxed depending on how far above the thresholds your actual income is.
This is where talking with a professional is important. For example, some believe if income is from tax-exempt interest like from municipal bonds, they don’t have to worry about how it influences the taxation of Social Security benefits. This would be a mistake.
Mistake #3 –  Required Minimum Distributions
If you have money in an IRA or 401(k), you need to begin taking required minimum distributions (RMDs) after you turn age 70 1/2. If you fail to do so, you risk a 50% penalty on what you should have withdrawn.
Financial organizations that administrate these plans have a requirement to advise you on your RMD. However, the responsibility to take the distribution resides with you.
If you’ve discovered you’ve made a mistake in taking your distribution, you need to correct that right away. Showing that you recognize the error and have taken action to correct it will help with the potential of having the IRS waive fees.
Also, if you don’t plan your required minimum distributions carefully, you could end up bumping yourself into a higher tax bracket. Again, this is where talking with a qualified financial advisor is critical to find the most tax-advantaged ways of dealing with RMDs.

  1. Some Bonds Get Taxed

Bonds are a popular option for folks in or nearing retirement. But it’s a mistake to believe that all bonds are tax-free. Some local bonds carry tax risk.
For example, some municipalities issue bonds for constructing things like sports arenas. These are called “private activity bonds”. If you face the alternative minimum tax or AMT, the interest from these types of bonds must be included in AMT calculations.
As a result, you could face a 28% federal income tax on that bond income.

 

The AMT was created years ago to prevent abuse from wealthy individuals claiming too many deductions. However, the tax itself hasn’t been indexed to inflation. That means that many middle-income taxpayers are now trapped paying AMT… so be very careful about this.

 

  1. Gifts

 

It’s popular for folks in retirement to distribute assets as gifts to their children and grandchildren. The thinking is this helps to minimize the size of the estate and potential probate taxes. Given that folks with assets of more than $5.45 million face Federal estate taxes a high as 40% it’s understandable why people want to avoid this.
You can give gifts up to certain thresholds after which if you give away more than the threshold you have to report the gift to the IRS.
Many people fail to make these filings because they misunderstand federal rules governing estates and gifts. It’s wise to talk with someone that knows about taxation to make sure you have a clear strategy for wealth distribution from your estate while you are still alive.