Get smart with your money
You know to contribute enough to your 401(k) to get the full company match. Maybe you’ve even adjusted your withholding so you’re not giving Uncle Sam an interest-free loan.
Yet you may feel the need to do even more, especially if you’re making the last big push toward retirement. These hacks allow you to shelter more money from taxes now and when you retire. In my latest for the Associated Press, the 4 crucial tax hacks you might not know.
Today’s top story: NerdWallet’s best credit card tips for April 2017. Also in the news: How one man dug out from $30K in debt, seniors are facing rising credit card debt, and should colleges require a financial literacy class?
NerdWallet’s Best Credit Card Tips for April 2017
The best cards for spring.
How One Man Dug Out From $30,000 in Debt
You can do it, too.
For Seniors, Rising Credit Card Debt Squeezes Tight
Medical debt is pushing seniors to the limit.
Should colleges require a financial literacy class?
Two experts weigh in.
Dear Liz: A friend of mine received a 2016 tax refund of over $9,000 even though this person did not pay nearly that amount in taxes over the course of the year. My friend has a fairly low-paying job with no benefits, is a single parent of two young children and receives no support from the children’s other parent. Given this scenario, is it possible to get a tax refund in an amount greater than what you paid in taxes?
Answer: Absolutely, and these refundable credits keep millions of working Americans out of poverty each year.
Refundable credits are tax breaks that don’t just offset taxes you owe but also can give you additional money back. Most of your friend’s refund probably came from the earned income tax credit, which was initially created in the 1970s to help low-income workers offset Social Security taxes and rising food costs due to inflation.
The credit was expanded during President Reagan’s administration as a way to make work more attractive than welfare. Each administration since has increased the credit, which has broad bipartisan support.
The maximum credit in 2016 was $506 for a childless worker and $6,269 for earners with three or more children. Your friend probably also received child tax credits of up to $1,000 per child. This credit, meant to offset the costs of raising children, is also at least partially refundable when people work and earn more than $3,000.
Dear Liz: Two years ago I rolled my 401(k) into an IRA at the suggestion of an advisor after I lost my job. The rollover was $383,000, and a secondary amount of $63,000 was transferred from my after-tax savings to a second account. All the fees for the advisor are taken from my small account and are 1.5% annually. My IRA is now at $408,000. Assuming an average earnings of 3% annually ($12,000), and with the advisor taking 1.5% ($6,000), I’m thinking this is not beneficial to me financially and that can I do better. Also, why is the advisor taking his fee out of my small (after-tax) account? I am 67 and filed for full Social Security in January.
Answer: You should ask your advisor to confirm this, but withdrawals from the smaller account are likely to trigger a smaller tax bill since most of the money there has already been taxed. A withdrawal from your larger account, which is presumably all pre-tax money, would result in a larger tax bill for you.
That’s the end of the good news. Given your age, with perhaps decades of retirement ahead, a good benchmark for you to use to compare your returns would be Vanguard’s Balanced Composite Index, which tracks the performance of funds that have 60% of their portfolios in stocks and 40% in bonds. The index returned 8.89% in 2016 and has a three-year average of 6.49%. Even a portfolio with a much lower proportion of stocks would have gotten better results than you did. Vanguard’s Target Retirement 2015 fund, with a stock exposure of less than 30%, earned 6.16% last year and 4.04% on average over the last three years.
Investment performance shouldn’t be the only way you judge an advisor, but giving up half your returns to fees could dramatically reduce the amount you have to live on in retirement.
Fortunately, you have options. You could hire a fee-only planner who charges by the hour to design a portfolio for you, and implement it yourself at one of the discount brokerage firms such as Schwab, Vanguard, Fidelity or T. Rowe Price.
Or you could explore the digital investment options known as robo-advisors, which invest and rebalance your money using computer algorithms. Some of the pioneers in this field include Betterment, Wealthfront and Personal Capital. Schwab, Vanguard and T. Rowe Price also offer digital investment services directly to consumers, while Fidelity offers it to advisors.
If you still want the human touch, some of the services — including Betterment, Personal Capital, Vanguard and T. Rowe Price — combine digital investment with access to advisors.
Today’s top story: Dodge these 5 tax mistakes. Also in the news: How to pay for expensive transgender surgeries, how to lower your energy bill, and the rare instances when student loans can be forgiven.
Dodge These 5 Tax Mistakes
Common mistakes to avoid.
How to Pay for Expensive Transgender Surgeries
Exploring the options.
How to Lower Your Energy Bill
Examining the physics behind your energy use.
These Are the Rare Instances in Which Student Loans Can Be Forgiven
Very rare.
Today’s top story: Don’t skip life insurance because of cost when having a baby. Also in the news: Wells Fargo could owe you money, crooks are targeting ATMs, and what you need to know about special needs financial planning.
Having a Baby? Don’t Skip Life Insurance Because of Cost
The sooner the better.
$110 Million Wells Fargo Payout Could Put Money in Your Pocket
If you got caught up in the fake fees scam, it’s time to get your money back.
Better Check Your Balance: Crooks Targeting ATMs
The return of the skimmers.
What to Know About Special Needs Financial Planning
Preparing for the unknown.