Six End-Of-Year Tax Tips

Six End-Of-Year Tax Tips

While we may be approaching the end of the year, there is still time to trim your tax bill for next year. Whether you had a year full of financial gain, suffered financial losses or rode the middle ground all year, you can still make moves to put yourself in a better position come tax day.

Now is a great time to make these easy and smart tax moves to reduce your taxes owed and maximize your returns when you file next year.

1. Make 401(k) and HSA contributions.

A great way to reduce your taxable income is to contribute to your 401(k) and/or your Health Savings Account. While you have until April 15 of next year to put money towards your HSA, the deadline for 401(k) tax-deductible contributions is December 31.

It’s a good idea to try and increase your 401(k) contributions and put in the maximum amount allowed. In 2020, that amount is capped at $19,500. For those who are 50+ the amount is capped at $26,000. Even if you can’t put in the maximum amount, any amount is helping you build your nest egg for retirement.

The contribution limit for a HSA in 2020 is $3,550 for individuals and $7,100 for family plans. Those who are 55+ can add an extra $1,000.

2. Convert money from a traditional IRA to Roth IRA.

If you lost income this year, it may be in your best interest to convert any traditional individual retirement accounts to a Roth IRA. You invest after-tax dollars into a Roth IRA, which means they grow tax-free over time. A major bonus for investing in a Roth IRA is the possibility that your money could be free of taxes in retirement.

Converting to a Roth IRA means you could potentially reap these benefits:

  • No required minimum distributions (RMD).
  • Very low tax levels.
  • Increased flexibility for estate planning and tax diversification.

3. Spend your FSA.

If you have a Flexible Spending Account that you use to pay for out-of-pocket health care costs and still have money left, you may want to use it before the year is over. While you can carry over money to the next year, it’s often limited to around $500.

If you’re not sure how to spend it before end-of-year, you can use your FSA funds for a plethora of items and services. These include eye exams, diabetic supplies, dental treatment, contact lenses, eyeglasses, first aid supplies, sunscreen, over the counter medicine and more.

4. Donate to charity.

If you’re looking to clean out your closet while also trimming your tax bill, consider donating unwanted clothes or other items to a local charity. You can receive tax deductions for donating non-cash items and/or money to qualified charitable organizations. If you’re interested in doing so, make sure to get an itemized receipt for everything you donate!

5. Purchase items for your business.

Consider making purchases for your small business or side-gig before the end of the year as “ordinary and necessary” business expenses can be used for tax deductions. These deductions are available to those who are self-employed. Purchases that are eligible for a tax write-off include: home-office supplies, mileage, expenses pertaining to your home-office and any equipment or materials bought for your business.

6. Meet with your advisor.

Taking the time to meet with your financial advisor before the end of the year is an excellent way to reduce taxes. Ultimately, they’re going to be your best source of knowledge when it comes to tax planning. They can dive deep into your unique situation and pinpoint possible strategies to reduce your taxes.

Not quite sure how to implement the strategies mentioned above? Need a professional opinion on your personal tax situation? SimplyAdvised can match you with a trusted and vetted financial professional in your area.

Six Common FAFSA Mistakes to Avoid

Six Common FAFSA Mistakes to Avoid

Billions of dollars of federal aid is given out to students across the country every year. The only way for your student to receive any of this money is by filling out the Free Application for Federal Student Aid, also known as FAFSA. Schools use the information they receive from this application to gauge a student’s eligibility for financial aid.

Completing the FAFSA means your child will be eligible for:

Grants: Money from federal and state governments based on financial need. Grants are a form of financial aid that, in most cases, does not need to be repaid.

Scholarships: Merit-based financial aid given to students. While some believe that means eligibility is not connected to the FAFSA, many scholarships offered by community colleges and universities require applicants to have it completed. Again, this is “free money” that doesn’t need to be repaid in most cases.

Work-study: Work-study allows students to work part-time on campus and use their earnings to pay for their tuition or other expenses. Those who fill out the FAFSA are considered to participate in work-study if they meet a certain criteria.

Federal Student Loans: All students who plan on taking out student loans are required to complete the FAFSA. One perk is that federal student loans are often more affordable and offer better benefits than private loans.

Filling out the FAFSA is crucial in securing money to fund your child’s education, so it’s extremely important that it’s completed correctly and turned in on time. If you’re not well-versed in the FAFSA, this is easier said than done as it’s notoriously long and confusing.

It may seem overwhelming, but don’t let its bad reputation scare you. Taking just a little bit of time to educate yourself on common FAFSA mistakes will put you in a much better position to avoid any missteps or headaches.

1. Not filling it out.

Some choose not to fill the FAFSA out because they believe they won’t be eligible for any money. Thinking like this can actually cost you money! As they say, nothing ventured, nothing gained. Without giving it a shot, you’ll never know what your child could receive. Even if it’s lower than the amount you were hoping for, it’s still money. Plus, you may be pleasantly surprised by what you may get.

2. Not preparing beforehand.

Before you do any other prep, you need to create a FSA ID. This is the online ID you use to login and complete the FAFSA, as well as access financial aid information.

Next, gather the documents required to complete the application. Preparing beforehand can expedite the process immensely. These documents include:

  • Social Security card for both parent and student.
  • Alien registration number (if you’re not a U.S. citizen).
  • Federal tax returns, W-2s, 1099s or any other records of the money you’ve earned. (Note: you can use the IRS Data Retrieval Tool to access these documents online).
  • Driver’s licenses (if applicable).
  • Bank statements such as savings and checking account balances.
  • Records of any investments.
  • Records of untaxed income (if applicable).

If you start the application and realize you don’t have one of these documents, don’t worry! You can save your progress, log out and complete it at a later date.

3. Not filing as soon as possible.

A lot of grants and scholarships offered through states and colleges are first-come, first-served. This is a major reason you don’t want to wait until the last minute to complete the FAFSA. The earlier you complete and submit it, the higher your chances are at receiving financial aid. Getting it done as soon as possible also means you won’t miss any deadlines!

4. Only filing once.

Filing the FAFSA is not something you only do once. There’s a common misconception that once your child’s college of choice has their FAFSA information, it’s good for the entirety of their time there. However, it needs to be submitted each year your child is attending college, even if your information or financial situation has not changed.

That being said, it does get less time consuming after the first time. Because you will already have your FSA ID account set up, your information will be pre-filled and waiting for your confirmation or any updates at the time of renewal.

5. Not filing an appeal if your financial situation has changed.

If families experience any loss in income due to job loss, reduction in hours, extensive medical expenses or large costs for dependents such as elderly parents or special needs children, there’s an option to appeal for more financial aid even after submitting the FAFSA.

Completing this form allows the college your child is already attending, or colleges they’re interested in, to reevaluate their financial needs. A best practice is contacting the college’s financial aid office to see what information they’ll need to start the appeal process.

6. Not finding help if you need it.

Correctly completing the FAFSA is crucial to securing financial aid. If you’re not confident in your ability to do so, the best option is to find help! Seeking the counsel of someone who knows what they’re doing is better than guessing and making simple errors.

Knowing how, when and what you’ll need to complete the FAFSA can be complicated and time consuming. Small errors can lead to big headaches, so it’s imperative that you fill it out correctly. SimplyAdvised can match you with a financial professional who can not only help you complete the FAFSA, but help you design an overall financial plan to send your child to college without putting you or your child in massive debt.

College Scholarships and Grants: What You Need to Know

College Scholarships and Grants: What You Need to Know

Figuring out how to finance higher education for your child or children can be a daunting task. While there are many options to explore, looking into scholarships and grants (also known as gift aid) is a great place to start. Unlike student loans, scholarships and grants don’t need to be paid back and can significantly decrease the amount you’ll need to pay out of pocket.

While they’re both essentially “free money” and some use these terms interchangeably, scholarships and grants are not the same thing. Understanding their differences can help you tremendously to secure them.

Scholarships

A scholarship is usually merit-based, meaning they are based upon a person’s achievements, academic or not. These achievements don’t necessarily need to be from the classroom, but can come from one’s hobbies or interests. They’re usually awarded for academic, athletic, artistic or musical talent. They can also be awarded to students who are going into a certain field of study or for their family background.

There’s vast amount of scholarships out there, and there’s no limit to the amount a student can apply for, and in most cases, use. It’s always important to check the terms and conditions before accepting a scholarship, but most of the time you can accept as many as you’d like. Some academic and athletic scholarships are “full rides” which mean they cover the entirety of a student’s expenses. In this case, you’d only have to accept one!

Grants

Unlike scholarships, grants are given based upon a student’s financial needs and economic status. There are four main types of grants: federal, private, state and institutional.

Federal Grants

These grants are given by the federal government to those attending a community college, four-year university or other career programs. Federal grants are broken down into four programs: Federal Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), Teacher Education Assistance for College and Higher Education (TEACH) Grants and Iraq and Afghanistan Service Grants.

Private Grants

These grants come from private companies and nonprofits. Private grants are usually given to low-income students or those who belong to a certain ethnic or racial group.

Institutional Grants

These grants are given by the institution that a student plans to attend. They often use the information from your FAFSA (Free Application for Federal Student Aid) to determine if you qualify for any grants. Many colleges and universities provide grants to help students attend their school.

State Grants

These grants are awarded by the state, oftentimes to encourage students to attend college. To receive a state grant, you typically must fill out the FAFSA, be a resident of and plan on attending college in that state.

How to Apply

The application process for scholarships and grants have some similarities, as well as some differences. One major similarity is that you can find and apply for a vast amount of them online. It’s as easy as typing in terms that match the description of a scholarship or grant you’re interested in on a search engine, and you’ll be met with a plethora of options.

It’s helpful to ask your friends, family and others in your local community if there are any opportunities they’re aware of. Another excellent resource is your child’s school. Their guidance counselor will most likely be a great asset in helping you find the best match for your child’s wants, needs and talents.

One thing that makes grants different from scholarships is that a student is automatically considered for federal and institutional grants when they submit their FAFSA. They usually don’t require any extra work or searching.

Tips for Applying for Scholarships and Grants

Stay organized.

If your student plans on applying for multiple scholarships and/or grants, it’s in their best interest to keep a list of the ones they’re interested in and which they’ve applied for. It may be helpful to create a spreadsheet that outlines the various requirements and deadlines or each grant/scholarship.

Be aware of potential scams.

There are scams designed to steal your personal information and/or take your money. Make sure the website you’re searching from and any offer your student receives is legitimate.

Follow instructions very carefully.

If you don’t follow instructions or miss a deadline, your application could be thrown out. As mentioned above, staying organized and using a spreadsheet will help ensure no deadlines are missed and that all requirements are met.

Don’t wait to apply.

Many think that they can only start applying for scholarships and grants their senior year of high school. This is false! In most cases, students can apply much earlier. As some opportunities are first come, first served, it’s important to apply as early as possible.

While there are many ways to pay for a student’s education, grants and scholarships are an excellent place to start. Receiving even one grant or scholarship can help chip away at a hefty price tag and reduce the amount of student loans that need to be taken out.

Even after receiving gift aid, sometimes there is still a considerable amount of money to be paid. Through careful planning and expert guidance, you can avoid going into debt or leaving your child with a large amount of student debt. SimplyAdvised has trusted and vetted experts who can help you find the best route possible to finance your child’s education.

Five Ways to Maximize Your Social Security Benefits

Five Ways to Maximize Your Social Security Benefits

What would an income increase of 10% mean to your retirement?

Would it afford you more freedom? More opportunity to travel? The ability to spoil your grandchildren? Or even the ability to buy that vacation home on the lake you’ve always dreamed of?

For most Americans, Social Security benefits are an important part of their retirement income. In fact, according to the Social Security Administration, a whopping 97% of the total population aged 60-89 receive at least some Social Security benefits [1].

Maximizing your retirement income can be key to the healthy and happy retirement you have always wanted. When combining it with other retirement income, your Social Security benefits are an important part of making this a reality.

What many people don’t realize is there are some simple things you can do now to ensure when the time comes for you to take your benefits, your income is maximized. Below we have outlined six of the top Social Security maximization tips. If you follow all of these, you can potentially maximize your benefits and ensure nothing goes to waste.

1. Maximize your working income and work for at least 35 years.

Your Social Security benefits are calculated based on the 35 years in which you earn the most income. If you do not work for at least 35 years, each year less than 35 is counted as zero which can significantly reduce your benefits. The higher the income you earn up to $137,700 (as of 2020) the higher the Social Security benefits you will receive, so be sure to do everything you can to maximize your salary and earning potential.

2. Know your full retirement age and wait to collect Social Security benefits.

While the Social Security Administration technically allows you to start pulling benefits at age 62, this could dramatically reduce your benefits. For example, if you start taking payments at 62, you will only receive 75% of the annual amount you are eligible for. Worst of all, this reduction is permanent! 

It is important for you to understand your “full retirement age” as defined by the Social Security Administration. This is calculated by the age you are born and ranges between 65 and 67. You can find out your “full retirement age” by clicking here. It is at this age that you will receive 100% of eligible benefits. It is worth mentioning that you can also wait to take your benefits until up to age 70. If you wait until age 70, you will receive 132% of the benefits you are eligible for. In other words, for every year you delay past your “full retirement age”, your yearly benefits increase by about 8%.

3. Take advantage of spousal benefits.

When it comes time to start thinking about your Social Security filing strategy, it is important to understand what kind of spousal benefits you may be eligible for. If you are currently married, or if you are divorced and were married for at least 10 years, you may be eligible to reap spousal benefits. This means the ability to claim benefits based on up to 50% of your current (or ex) spouses benefit (at their full retirement age). This is especially important if one spouse earns significantly more money and is expected to see a much higher Social Security benefit. Being strategic on the timing that both you and your spouse claim your benefits is key. Be sure to find a trustworthy Social Security calculator online to determine the best course of action for you and your spouse to ensure that together, your lifetime benefits are maximized.

4. Claim family benefits.

When it comes time for you to file, if you have dependent children who are under the age of 19, they may qualify to receive up to 50% of your benefit. Note, this will not decrease your benefit amount, it will be added on top of it. You will want to keep this in mind when deciding on when to claim benefits as you should add this into your calculation for your lifetime benefit. For example, if you have one or multiple dependent children under the age of 19 when you turn 62, it may make sense for you to start claiming as soon as you are eligible vs. waiting for full retirement age. This is of course highly dependent on your unique situation, so be sure to crunch the numbers and find out what will work best for your family.

5. Minimize your taxes.

There is a common misconception that Social Security income is not taxed. Unfortunately, for many of us, this is not true. Depending on your overall retirement income, you could be required to pay taxes on up to 85% of your Social Security benefit. Taxes in retirement can add up to a significant sum of money and can greatly reduce your overall income in retirement. A key in maximizing your retirement income is doing everything you can to keep this as low as possible.

[1] https://www.ssa.gov/policy/docs/population-profiles/never-beneficiaries.html

Having a financial professional dive deep into each of these points while keeping your unique situation and financial history in mind is the key to maximizing your benefits. SimplyAdvised can put you in contact with a knowledgeable professional who can help.

Nine Questions to Ask a Financial Advisor in Your First Meeting

Nine Questions to Ask a Financial Advisor in Your First Meeting

Before you commit to hiring a financial advisor, it’s important that you ask the right questions. You’ll be working with this professional to achieve your financial goals—whatever they may be. You’ll want to feel confident that they’ll be able to guide you through important decisions and work with your best interest in mind. It’s crucial to be aware of their credentials, experience and knowledge.

Asking these nine questions will give you a good idea if they’re someone you’d be interested in working with. 

1. Are you a fiduciary?

A fiduciary works in the best interest of their client and puts their needs first. Non-fiduciary advisors may be selling their firm’s products/services to earn commission, which could skew their recommendations away from what fits you best.

2. Do you hold any industry certifications?

There’s a wide range of certifications financial advisors can hold. It’s important to understand the background of the person you could potentially be working with.

3. How are you compensated for your services? 

Financial advisors are compensated differently depending on the firm they work for. Whether it be an hourly or a flat fee, this is always a good question to ask so you know what to expect. 

4. What is your investment philosophy?

An investment philosophy will usually determine how your money will be handled. While one advisor might focus on long-term investing in a globally diversified portfolio and may encourage choosing only low-cost exchange-traded funds, another advisor might have an entirely different philosophy. Asking this will make sure you’re both on the same page. 

5. Is there a niche that you work with?

Everyone has different needs from their financial advisor. Make sure you’re working with someone who specializes in the area(s) you’re focusing on.

6. Do you have any account or relationship minimums? 

Depending on your portfolio size, some advisors might be a better fit than others. 

7. How often will we meet?

While this is pretty straightforward, it’s important for you and your advisor to be on the same page  in regard to how often you’ll meet—whether that be annually, semi-annually or quarterly. 

8. How will I hear from you?

You may have a preference of how you’d like to communicate, whether it be phone, email, video conference or in-person. Most advisors are more than happy to communicate with you in whichever method you prefer, just let them know! 

9. Do you have any references? 

Similar to looking for a job candidate, when you’re looking to find the perfect advisor you’ll want to know what others who have previously worked with them have to say.

While you should do your research ahead of time and use search tools to look into someone you’re going to potentially work with, it’s still good to get this information from the advisor themselves and make sure they’re transparent and truthful. 

At the end of the day, you’re creating a relationship. If hired, you’ll be trusting this professional with your financial future. This means you’ll want to be certain that this is the right advisor for you. Asking these questions may be a little uncomfortable, but having a clear understanding of an advisor’s expectations, qualifications and philosophies will be beneficial to both of you in the long run.

401(k) vs. Traditional IRA vs. Roth IRA

401(k) vs. Traditional IRA vs. Roth IRA

Which retirement account is best for you?

The world of personal investing, finance and retirement is filled with acronyms: traditional IRA, Roth IRA, 401(k), RMD, APR, ETF, FDIC and so many more. While they may seem intimidating, a degree in finance is not required to understand the three key retirement accounts that you likely already have access to: a traditional IRA, Roth IRA and a 401(k) plan. 

All three of these plans are considered “tax-advantaged” plans. This means your investments offer tax benefits in the form of tax exemptions or tax deferrals. As many know, taxes can eat up a significant portion of your retirement income and your retirement strategy should account for this. 

Understanding the differences between these accounts and knowing which one (or combination) is best for you and your family could be the key to a long-lasting and stress-free retirement.

401(k)

This is a plan that is generally offered through an employer. You can make tax-free contributions to this plan through automatic payroll withholding. Essentially, this plan automatically contributes or invests a certain percentage of your payroll each month. Depending on your plan, you can then set up these contributions to be allocated to different investments that your plan offers. You can contribute any percentage of your salary to this plan, but there are annual contribution limits. For 2020, if you are under 50 years old, the limit is $19,500. If you are 50 or older, you can contribute up to $26,000.

401(k) Pros

  • Income grows tax-free allowing for larger initial investments and potentially larger growth.
  • Many employers will match a certain amount of your contribution—essentially free money for you.
  • There is a large annual contribution limit which offers the largest tax advantage compared to Roth IRAs and traditional IRAs.
  • Distributions are potentially taxed when you are in a lower tax bracket in retirement.

401(k) Cons

  • Limited investment choices.
  • Distributions are taxed as ordinary income.
  • Due to the costs of running a 401(k) program, they often include high account fees.
  • You are required to start taking Required Minimum Distributions (RMDs) at age 72.
  • Early withdrawal fees if you take distributions prior to 59.5 years of age.

As a bare minimum, you should consider contributing enough to get 100% of the money your company will match. This is essentially “free money” you can use to invest in your future.

Traditional IRA

Individual retirement accounts, also known as IRAs, are similar to 401(k) plans as they’re both tax-advantaged investment vehicles. There are two main flavors of IRAs, the traditional IRA, and the Roth IRA. With a traditional IRA, similar to a 401(k) plan, you contribute pre-tax dollars. This allows your money to grow tax-deferred, meaning you do not pay taxes on your original contribution or your earnings until you start taking withdrawals. Contributing a larger amount of money up-front due to taxes being deferred not only allows you to potentially achieve higher lifetime returns (due to the power of compounding), but it also opens up the potential to pay taxes when you are retired—often in a lower tax bracket.

Traditional IRA Pros

  • Income grows tax-free, allowing for larger initial investments and potentially larger growth.
  • No income limits.
  • Invest in any accounts offered by your brokerage (stocks, bonds, ETFs, mutual funds, etc.).

Traditional IRA Cons

  • Early withdrawal penalty if you withdraw before age 59.5.
  • Distributions are taxed as regular income.
  • Strict total IRA (Roth + traditional) contribution limit of $6,000 if under 50 and $7,000 if 50 or older per year.
  • Required Minimum Distributions (RMDs) are required starting at age 72.

At the end of the day, determining which IRA makes the most sense for you likely comes down to the tax bracket you expect to be in during retirement. If you believe you will be in a lower tax bracket than you are now, it likely makes sense to max out a traditional IRA. This will allow your money to grow tax-free until you take distributions when you are in that lower tax bracket.

Roth IRA

The key difference between a traditional IRA and a Roth IRA is the timing of the tax advantage. With a Roth IRA, you contribute your money post-tax, meaning you pay taxes on the income, and can then invest your money in the account. The benefit comes on the back end. When you withdraw your money, you generally do so tax-free. Another key difference is that Roth IRAs have income limits. This means that if your Modified Adjusted Gross Income (MAGI) is over $124,000, your total contribution limit phases out based on your income. If your MAGI is over $139,000 you are no longer eligible to contribute to a Roth IRA.

See the two charts below that display 2020 contribution limits for all three tax-advantaged accounts, as well as a breakdown of the income limit phase for Roth IRAs.

If your income or your joint income place you in the “phases out” category, you can learn how to calculate your Roth IRA contribution limit using the IRS formula here.

Contribution limits of IRA, Roth IRA and 401(k)

2020 Contribution Limits Traditional IRA Roth IRA 401(k)
Combined limits in all IRA accounts: $6,000 or $7,000 if 50 or older

If under age 50: $19,500

If 50 or older: $26,000

Roth IRA income limits and phase out

Filing Status 2020 MAGI Contribution Limit
Single Less than $124,000 $6,000 ($7,000 if over 50 years old)
$124,000 to $138,999 Phases out
$139,000+ Not eligible
Married Joint Filing Less than $196,000 $6,000 ($7,000 if over 50 years old)
$196,000 to $205,999 Phases out
$206,000+ Not eligible
Married Separate Filing Less than $10,000 Phases out
$10,000+ Not eligible

 

Roth IRA Pros

  • Earnings grow and are withdrawn tax-free.
  • Contributions can be withdrawn at any time tax-free.
  • No Required Minimum Distributions (RMDs).

Roth IRA Cons

  • Taxes are paid upfront, and earnings grow off of post-tax dollars.
  • Income limits may reduce the amount you can contribute.

If you believe you will be in a higher tax bracket when you are ready to withdraw from your account and your income level allows it, the common practice is to max out your Roth IRA. This will allow your money to grow and be withdrawn tax-free once you are ready in retirement.

The most common strategy people take when it comes to retirement accounts is to start with their 401(k) and contribute up to what their employer will match. From there, depending on their income situation, they generally max out their Roth IRA, traditional IRA or a combination of both. If they still have money left over, the next step would be to max out their 401(k) to the total limit. Finally, if they still have money left over to invest, it is recommended to explore a traditional investment (stocks, bonds, ETFs, mutual funds, etc.). However, these investments are not tax-advantaged.

What is right for you?

Where to contribute your retirement funds can be an incredibly complicated, but also a very important decision. What works best for one individual or family does not always work best for the next. SimplyAdvised works with hundreds of financial professionals nationwide who can review your personal situation and help recommend what the best solution is for you.