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Common Mistakes When Choosing a 529 College Savings Plan

The BIDaWIZ Team — Fri, 24 Jan 2014 20:53:02 +0000

A 529 college savings plan offers many parents and future college students with an attractive option for socking away funds for tuition expenses. While the plan offers many benefits, the account holders don’t always understand the mechanics of how the plans work and how they can be used effectively. Find out if you understand the complete capabilities and limitations of these plans.

What’s a 529 college savings plan?
Contributions to these state sponsored educational savings plans grow tax-deferred, and distributions to pay for the beneficiary’s college costs are tax-free. Expenses for the plan can be used for tuition, fees, books, supplies, and equipment. Room and board are also covered by the plan as long as the beneficiary is a student for at least half of the school year.

What if I withdraw the funds and pay the tuition the next year?
The 529 plan is part of the Internal Revenue Code. As such, the timing for withdrawing funds from the account and using them to pay for tuition must occur in the same tax year. This means that if you withdraw funds from a 529 plan at the end of 2013, they must be used to pay 2013 tuition bills. Otherwise, you may have to pay taxes on what was supposed to be tax-free earnings.

Claiming the state tax deduction properly
Most states also offer a state tax deduction for contributing to the plan. For instance, a married couple filing jointly with a New York State sponsored plan, could deduct up to $10,000 of their contribution; married filing separate filers would be able to deduct up to $5,000 per year. Please note that in most states like New York, the 529 plan account holder is only allowed one deduction per year even if they own another 529 plan account. In addition, if a grandparent or third party wants to contribute to a 529 plan and claim the state tax deduction, they would have to open a separate 529 plan account from the parent.

Take into account scholarships and educational tax credits
You need to plan ahead when considering how much money you should withdraw from the 529 plan when it’s time to pay for tuition. If you withdraw enough to cover all of tuition for the year and later find out that the student qualifies for a partial scholarship and/or an educational tax credit, you may not be able to use all of the 529 plan distribution tax-free. You cannot combine 529 plan distributions to cover the same expenses that are covered by a scholarship or tax credit.

If you do happen to withdraw too much from the 529 plan, you could always rollover the excess amount into another 529 account within 60 days. Please note that you’re only allowed only one rollover for each 529 account you own within any 12 month period.

More tax questions? Browse answers or ask your 529 plan questions online.

Should I Invest Money In The Market Or Pay Off My Student Loans?

The BIDaWIZ Team — Fri, 10 Jan 2014 23:06:12 +0000

Many recent graduates continue to be encumbered with student loan debt. In fact, there are now $1 trillion of federal student loans that are outstanding, which is greater than all of the credit card debt owed by borrowers. If you happen to be building a nest egg either on your own merit or through a generous inheritance, paying off at least part of that student loan debt may be an option? Should you or should you invest it?

Should you pay off any of your student loan debt?
You should certainly pay off at least some of your student loan debt. If you have all fixed-rate student loans, you should focus on the debts with the highest APRs and balances. Those with student loans that have variable interest rates, may need to compare and forecast the expected rate in the future.

How much should you pay off?
As for whether you should pay part, half or all of it off now, that largely depends on your financial position. If you use part or half to pay off your student loans, make sure you still have enough cash for emergencies. Generally speaking, you should have at least 6 months’ worth of living expenses available at any given time for unexpected events. If you already have an emergency fund and no other debts, then you can certainly start with paying off some of the debt with the highest interest rates. As for investing some, you’ll need to achieve at least a return equivalent to the interest rate on the debit for this option to be worthwhile.

What about consolidating student loans?
Consolidating can simplify the loan repayment process by centralizing your loans to one bill and you can lower monthly payments by extending the term of repayments. There also may be new options with the consolidated plan and the ability to lower your overall rate. However, it’s possible that you could lose some benefits of your existing loan plan. Be sure to compare your options. The other thing to note is that when your loans are consolidated, they cannot be removed. Thus, you need to be sure you want to do this and the benefits outweigh the drawbacks.

More questions? Browse answers or get your student loan questions answered online.

What Can You Do If You Haven’t Been Saving Enough For College?

The BIDaWIZ Team — Wed, 27 Nov 2013 22:34:47 +0000

The cost of tuition continues to rise; albeit at a lower rate than in previous years. With that in mind, we thought it would be important to highlight a special provision for contributing to a 529 plan. Those that haven’t been saving for college may still benefit from this special relief.

What’s a 529 plan?
This tax-free savings account is sponsored by a particular state or group of states that and is used strictly for college expenses. Most states also offer a state tax deduction for contributing to the plan. For instance, a married couple filing jointly with a New York State sponsored plan could generally deduct up to $10,000 of their contribution; married filing separate would be up to $5,000 for the year. The funds must be used to pay for college tuition and other eligible expenses or the account holder will face tax penalties.

Special provision to contribute more than the annual gift tax exclusion
A special rule for section 529 plans allows an individual to give up to five years’ worth of plan contributions at one time, which means a single parent can contribute up to $70,000 at once (the $14,000 gift tax exclusion times 5 years). Thus, a married couple could contribute $140,000 at one time for each child’s future education without any gift tax consequences.

Should I open one 529 plan for all of my children?
While it is possible to have one 529 account for many children to transfer any unused funds from one child to another, it’s not recommended. Rather, setup separate 529 plans for each child since the investment allocation should vary based on the child’s age and it’s easier from a bookkeeping standpoint. Furthermore, financial aid eligibility can be difficult when there are multiple children under one plan with an exorbitantly high balance.

More tax questions? Browse answers or ask your 529 plan questions online.

What Are The New Cost Basis Reporting Rules For The 2012 Tax Year?

The BIDaWIZ Team — Fri, 01 Mar 2013 12:00:14 +0000

Last year, the new cost basis reporting rules went into effect. This greatly impacted brokerage houses as well as taxpayers because of the time required to meet this new requirement. More paperwork is on the way. Specifically, in addition to stocks, you and your broker are now both responsible for reporting the cost basis of mutual funds shares, dividend reinvestment plans (DRIPs) and most exchange traded funds (ETFs) for the sale of such securities during the 2012 tax year.

Does this new rule apply to all transactions?
Not for the broker. The broker is only responsible for reporting the sale of these securities (in addition to stocks) if they were purchased on or after January 1, 2012. For instance, if you purchased these securities PRIOR to 2012, the financial institutions are not responsible for tracking the cost basis, that is the sole responsibility of the taxpayer. But, you better have supporting documentation to justify the cost basis used when reporting your capital gains.

What cost basis method should I use?
The answer depends on your specific investment portfolio, which investments are in a gain or loss position, when those investments were made and what you expect to happen to your unrealized positions. Most brokerage houses default to the FIFO or average cost reporting method for mutual fund share cost basis reporting. However, you need to review your specific portfolio to do determine if that is the best method for you.

What should I review on my 1099-B form?
You will also want to make sure that you are in agreement with your financial institution as to the cost basis of each of your positions. This is the first year financial institutions will be implementing these new reporting methods for these specific types of securities so it would be wise to identify any mistakes now. Yes, stocks were reported this way last year, but some of these securities such as those in a DRIP program can be incorrectly reported.

Will there be any additional cost basis reporting requirements in the future?
Yes, for the 2014 tax year, most options that are acquired/granted and sold/exercised will need to be reported on the form 1099-B. It wouldn’t hurt to review your portfolio now for options as this may be one of the more tricky reporting requirements the IRS has given brokerage houses in recent time.

More Questions? Browse answers or ask your 1099-b form questions online.

Avoid These IRA Tax Issues When Investing

The BIDaWIZ Team — Fri, 01 Mar 2013 08:30:07 +0000

Many Americans contribute to their IRAs to build their retirement portfolios for later in life. The Investment Company Institute recently reported that $5.2 trillion in assets is currently held in these accounts. Yet, many Americans don’t realize the complexities and potential tax issues that they can run into down the road if they don’t manage these accounts appropriately.

Be mindful of prohibited transactions
You can lose the tax favorable IRA status if you participate in prohibited transactions. This includes borrowing money from your IRA, receiving compensation for managing it and using the IRA to purchase property for current or future use. If you do happen to rollover your IRA and withdraw it to yourself, you have 60 days to redeposit it into the same or another IRA before it becomes a taxable distribution that may be subject to early withdrawal penalties. You also can only rollover an IRA into another one once every twelve months.

Take your required minimum distributions on time
Traditional IRA holders must withdraw required minimum distributions (RMDs) annually, by April 1st of the year after they turn 70 1/2. Subsequent distributions are due by December 31st each year. If the retirement account holder owns 5% of the business sponsoring the IRA, the required minimum distributions must occur when the account holder reaches the age of 70 1/2 regardless of whether or not they’ve retired. If they fail to take distributions, then they may face a stiff tax penalty of 50% of the amount that should have been withdrawn in addition to the ordinary income tax. But, it is possible to try to have the penalty waived by making up for the missed distribution and asking the IRS for relief. The other option is converting the traditional IRA into a Roth prior to the first RMD payment due. However, you’ll be subject to taxes on the conversion.

Did you contribute too much to your IRA?
An IRA contribution that is not permitted or larger than permitted, is treated as an excess contribution. There are steps that you can take to correct the issue, but if you do nothing, you will owe a 6% penalty for each year that the excess contribution is not corrected. For instance, if your contribution exceeded the amount allotted for your income level by $2,000, you would owe $120 each year the excess contribution remains. There are a few ways to correct this situation to avoid the 6% penalty. You can simply withdraw the excess contribution prior to your tax return due date (~April 15th plus extensions). For instance, if you contributed more than you were allowed to in 2012, you could simply withdraw the excess contribution and any income attributed to the contribution by April 15, 2013 or October 15, 2013 if you plan to file an extension.

More Questions? Browse Answers or ask your ira tax questions online.

Your Employer May Soon Change Their 401K Matching Program

The BIDaWIZ Team — Fri, 07 Dec 2012 15:00:43 +0000

IBM recently announced plans to reduce the frequency of matching employee 401(k) contributions to only once a year. This will take place on December 31st of each year. While IBM is only the first company to announce the change, they did employ as much as 105,000 U.S. workers as of 2007 (disclosed during a U.S. Congressional testimony). We expect IBM’s announcement to be the start of a trend in the employee benefits space. Will this impact your 401(K) plan in the future?

How 401(k) plan matching programs work
Most employers will match employee 401(k) contributions up to a certain percentage of their salary. Typically, 5% to 10% of employee salaries will be matched for the contributions made. There are limits though. The IRS actually doesn’t allow you and your employer’s contribution to exceed the lessor of 100% of your salary or $50,000 for 2012, $51,000 for 2013. Individually, employees cannot contribute more than $17,000 in 2012 and $17,500 in 2013 unless they are 50 years old or more. Older employees can contribute an additional $5,500 “catch-up” contribution. Whichever amount you decide to contribute for the year, your employer will usually match every pay period. For instance, if you set aside $15,000 of your $100,000 salary to your 401(k) plan and your employer matches up to 10% of your wages or $10,000, then a total of $25,000 will be allocated to your 401(k) for the year. If you are paid bi-weekly, then $577 of your paycheck will be allocated to your 401(k) and $384 will be matched by your employer every pay-period.

What’s the change to IBM 401(k) plans going forward?
Instead of IBM matching your contribution with $384 every pay period, the company will only match one-time for $10,000 at December 31st. This lump sum amount also will only be paid to you if you are still an employee as of the end of the year. For instance, if you left the companry or were laid off in November of that same year, you would lose out on the 401(k) matching contribution for the year.

What are the drawbacks of a lump-sum payment for the employee?
The risk is being shifted to the employee as they will need to stay the full year to receive the matching contribution. In addition, by only receiving a lump-sum payment at the end of the year, employees will not be able to utilize the strategy of dollar-cost averaging. This strategy helps employees reduce their risk by purchasing investments at various price points throughout the year.

Should I still contribute to my 401(k) if my employer follows IBM’s lead?
Of course. While you won’t be able to manage your employer’s contribution during the year should they elect to pay a lump-sum 401(K) matching contribution, you can still contribute yourself each pay-period. Your 401(k) will grow less during the year as compared to previous years.

More Questions? Ask your 401k tax questions or find accountants in new york online.

Contributing To Your 401K And Roth IRA

The BIDaWIZ Team — Fri, 30 Nov 2012 17:00:43 +0000

According to a recent study conducted by the Employee Benefits Research institution, 60% of respondents age 55 or more had less than $100,000 in retirement savings and 40% had less than $25,000. Of course, this is concerning to us considering the rising cost of medical and living expenses. However, those in their 50s can still plan for retirement.

Contribute to your retirement account
Whether your employer matches contributions or not, it’s generally recommended to contribute to your 401(k). Starting in 2013, employees that participate in a 401(k) or 403(b) plan, can contribute a maximum of $17,500, which is up from $17,000 in 2012. Unfortunately, the $5,500 “catch-up” contribution doesn’t increase in 2013 for employees that are 50 or older, but it still allows those account holders to contribute a total of $23,000. Let’s suppose that you start to contribute the maximum for the next 10 to 15 years or when you’re 60 to 65. At that point, you would have accumulated $230,000 to $345,000 in 401(k) assets which doesn’t include inflation adjustments or investment growth.

Should I I start to contribute to a Roth IRA too?
Yes. Please note that you can only contribute $5,000 to a Roth IRA ($5,500 in 2013) versus up to $17,000 to a 401(k) for 2012 (excluding catch-up contributions). Still, a Roth IRA provides certain benefits that aren’t present with a 401(k). First, contributions for a Roth IRA grow tax-free as opposed to tax-deferred for a 401(k). Therefore, the tax savings for a Roth IRA will be greatest with individuals that expect to be in a high tax bracket when they are age 59 1/2 or older. The opposite is true of a 401(k). Secondly, Roth IRA plans do not require minimum distributions during your lifetime as is the case with 401(k) and traditional IRA accounts. Specifically, those account holders must make withdrawals annually, by April 1st of the year after they turn 70 1/2. Subsequent distributions are due by December 31st each year. If they fail to take distributions, then they may face a stiff tax penalty of 50% of the amount that should have been withdrawn in addition to the ordinary income tax. By the way, required minimum distributions are also mandatory for Roth 401(k) plans. That’s not all. Distributions from a traditional IRA or 401(k) plan could result in higher taxes when taking social security distributions. For instance, married couples will face a 50% tax if the sum of their income and half of their Social Security distribution and any nontaxable interest income is between $32,000 and $44,000. If their income exceeds $44,000, up to 85 percent of the Social Security benefit becomes taxable.

Delay drawing from your social security benefits
Technically, you can begin collecting social security benefits when you reach the age of 62. But, you can also wait until you are 70 years old too. Of course, the amount of monthly benefits you receive will differ depending on which age you begin collecting. For instance, if you choose to begin collecting social security before your full retirement age, your monthly payment will be reduced by the number of months you elected benefits prior to retirement. Full retirement age is 65 years old if you were born in 1942 or earlier, 66 years old if you were born between 1943 and 1959, and 67 years old if you were born in 1960 or later. If your full retirement age is 67 years old and you began collecting your social security at the age of 62, your benefits would be reduced by 30%. It would be 25% if you began collecting at 63, 20% at 64, 13.3% at 65, and 6.7% at 66. At 67, you would receive the full amount of benefits. Let’s put this into real numbers with an example. Let’s say your current income is $100,000 and you were born on February 15, 1961, which means your full retirement age is 67 or in 2028. If you waited until your full retirement age of 67, your monthly social security benefits would be $2,341. At 66, it would be $2,171. At 65, it would be $2,005. At 64, it would be $1,840. At 63, it would be $1,712. At 62, it would be $1,588. Needless to say, you will likely receive the most benefits if you hold off on collecting social security until you reach the age of 70 which the payout would be $2,930 per month.

More Questions? Browse Answers or ask your retirement planning questions online.

Three Smart Ways To Spend Your Tax Refund

The BIDaWIZ Team — Fri, 30 Nov 2012 08:15:17 +0000

As we approach the final month of the year, we need to look ahead to our 2013 budget. Your tax refund for the 2012 tax year should be heading your way about 7 to 10 days after you e-file your tax return, if you’re eligible. How exactly do you plan on spending your tax refund? We have some wise suggestions.

Paying down credit card debt
The most costly debt you will earn in life is consumer credit card debt as rates are typically 15-20% annually, if not more. By using proceeds from your tax refund to pay off credit card debt, you’re reducing your interest in the future, which is usually the most attractive option. If you think it’s smarter to put money into the stock market, you’ll need to earn 15-20% annually on those investments for that choice to make more sense than paying off credit card debt.

Putting a down-payment on a home or improvement
You can certainly start building equity in the most valuable asset you’ll accumulate in life, which is your home, or at least for most people. If you already have a home, you can put money towards improvements as that will increase the value and the cost basis for when it’s time to sell later on down the road.

Retirement account contributions
You can sock away money into a 401K or IRA for tax deferred treatment. In many instances, a Roth IRA is also attractive as the principal grows tax-free and there are no required minimum distributions as is the case with a traditional IRA and 401K. Also note that starting in 2013, employees that participate in a 401(k) or 403(b) plan, can contribute a maximum of $17,500, which is up from $17,000 in 2012. As for IRAs, the maximum contribution increases by $500 in 2013 to $5,500. This applies to a Roth IRA too.

More questions? Browse answers or ask tax refund questions online or find an accountant online.

How Much Should I Withdraw From My Retirement Account Annually?

The BIDaWIZ Team — Fri, 02 Nov 2012 17:45:49 +0000

Many baby boomers are already retiring or will do so within the next ten to fifteen years. One of the questions that retirees frequently ask themselves is, “Am I withdrawing the correct amount of funds from my retirement account each year?” If they withdraw too much, they won’t have enough money to last them through retirement. If you withdraw too little, then they’ll find themselves having difficulty maintaining a budget. It’s a constant balancing act. One school of thought suggests that retirees withdraw about 4-5% annually.

Withdrawing 4-5% annually from your retirement account
The 4-5% rule is largely based on historical data and average returns over a long term period. While the 4-5% rule may be a starting point for many retirees, we don’t believe the withdrawal rate can possibly be a one size fits all answer. There are so many variables such as investment performance, life expectancy, retirement expenses, and personal events. Rather, we suggest that you identify a withdrawal rate that is specific to your set of circumstances by building out a lifetime budget. You need to put ranges for your expected rate of return, market inflation, retirement expenses and life expectancy. This lifetime budget will give you an idea of exactly how much you can withdraw annually based on best and worst case scenarios. It is recommended that you provide an additional cushion to cover any unexpected events.

After I set my retirement withdrawal rate, am I done?
Absolutely not. The best retirement plans are ones that are constantly fine tuned based on external factors that impact your original plan. Retirement plans really need to be a living breathing document. For instance, you may determine that 5% is your annual withdrawal rate when you begin retirement. Years later, because of certain market and personal conditions, that rate may drop to 3.5%. Perhaps, four years after that, you’re up to 8.5%. You need to constantly monitor your retirement withdrawal rate.

More Questions? Browse Answers or ask your retirement planning tax questions online.

Should I Still Contribute To My 401K When I’m Older?

The BIDaWIZ Team — Fri, 19 Oct 2012 18:30:49 +0000

Many of the 75 million individuals in the baby boomer population are already in their 60s or will be so within the next 12 years. One of the questions that they need to be asking themselves is, “What should I do with my 401(K) when I reach retirement age?” Of course, the answer to this question is somewhat dependent on their future employment status.

Are you still going to be working in your 60s?
If so, that’s great to hear as many individuals make the mistake of retiring too early.

Anyway, if your employer matches your contributions, then it’s likely a no brainer to continue to contribute to your 401(k) in your 60s. Even more, if you’re still working, then you reap the benefits of delaying your required minimum distributions (RMDs) until the year after you retire. Those that are already retired must begin to take RMDs by April 1st of the year after they turn 70 1/2. You’re probably asking yourself, “What if my employer doesn’t match contributions?” Even in that instance, it’s still likely that you’ll benefit from contributing to your 401(k) since the account appreciates on a tax-deferred basis and the returns compound.

What if I’m not working when I reach retirement age?
As we previously stated, 401(k) holders technically have to begin taking withdrawals by April 1st of the year after they turn 70 1/2. If they fail to do so, then they may face a stiff tax penalty of 50% of the amount that should have been withdrawn in addition to owing federal and state taxes. The other option would be to rollover the 401(k) to an IRA and then convert the IRA to a Roth IRA. A Roth IRA doesn’t have any RMD requirements, but a conversion will likely result in a large tax bill as pre-tax contributions are converted to after-tax.

More Questions? Browse Answers or ask your 401k questions online.