PFwise.com
Search
  • Home
  • Blog
  • Tools
  • Know-how
    • Insurance 101
    • Annuity 101
    • College Planning
    • Real Estate
    • Retirement Planning
    • Smart Investment
    • Stock Ideas
    • Tax Planning
  • About Us
  • 中文
  • Resources
    • Personal Finance Reading List
    • Financial Aid Resources
    • Personal Finance Calendar
    • Retirement Planning Calendar
    • ETF list
    • Financial Glossary
  • Newsletters Archive

Self Employment Tax

9/27/2013

0 Comments

 
Picture
Q. If I start my own business, how much self employment tax I need to pay?

A. If you plan to start a small business and pay yourself, you'll need to know a thing or two about the taxes you owe. One special tax that trips up a lot of small business owners is the self-employment tax, which is also known as the SE or SECA tax (which stands for Self-Employment Contributions Act tax.) This is essentially the same as the FICA tax that is paid by employers and employees for Social Security and Medicare.

Many newly self-employed people, such as sole proprietors, independent contractors and consultants are surprised to find that they pay a lot more in tax as a self-employed person than as an employee. That's because they are required to pay the full amount of their Social Security and Medicare tax, which is typically split between traditional employees and their employer.

There are three parts of the self-employment tax that individuals must pay:

12.4 percent Social Security tax. For 2013, this tax applies to the first $113,700 of net profit or earnings from self employment. If you have earnings above this dollar limit (from self-employment or, if you also have a job, from the combined earnings from your job and your business), then the earnings above this dollar limit are not subject to this 12.4 percent tax.

2.9 percent Medicare tax. The Medicare portion of the self-employment tax applies to all earnings from self-employment and all wages from traditional employments -- there is no earnings limit like there is for the 12.4 percent tax.

0.9 percent additional Medicare tax. This tax was created and imposed beginning this year under the Affordable Care Act, also known as Obamacare. This additional 0.9 percent Medicare tax applies to income from self-employment and/or wages that exceed $200,000 for single filers and $250,000 for married filers.

It's important to note that these taxes, which can total to more than 16.2 percent, are in addition to the taxes imposed for federal and state income taxes. Also, as is the case for most dollar limits in the tax code, the income limits above will gradually increase each year with the effect being that more of your income will be subject to these onerous taxes. For more information on this tax, see IRS Tax Topic 554 - Self-Employment Tax.

Reporting the self-employment tax

If you are a small business and do not incorporate or form a partnership, then you report the net profit or income on Schedule C and include this with your Form 1040. You calculate your self-employment tax on Schedule SE and report that amount in the Other Taxes section of Form 1040.

When figuring self-employment tax you owe, you reduce your self-employment income by half of the SE tax before applying the rate. You also claim 50 percent of what you pay in self-employment tax as an adjustment to income, which is allowed on the front of your Form 1040. For example, if you owe $3,000 for self-employment tax, then you can claim an adjustment to income of $1,500, which reduces your income tax by $375 assuming you are in a 25 percent tax bracket. This adjustment to income is available whether or not you itemize deductions.

A real life example

Say you run a landscaping business as a sole proprietor. In 2013 your net profit as reported on Schedule C is $75,000. Your net earnings subject to the SE tax is calculated on Form SE and would be $69,262.50 ($75,000 x 0.9235). Your self-employment tax would be $10,597.16 ($69,262.50 x 0.153) and you would report that amount on Form 1040 in the Other Taxes section.

You would also report one-half of your self-employment tax, $5,298.58, ($10,597.16 X .50) on Form 1040 as an adjustment to income, which reduces your adjusted gross income and the amount of income tax you owe.

When you work as an employee, you get a paycheck that is less than what you earned because your employer withheld taxes for Social Security, Medicare and income tax and sent that money to the government. But when you are self-employed, the entire burden for paying employment taxes and estimated income taxes is on you. As a self-employed taxpayer you should make payments of estimated taxes throughout the year in quarterly installments because if you do not, you may trigger additional penalties for underpaying.



0 Comments

Does IRA Fit You?

9/26/2013

0 Comments

 
Picture
Q. I am considering IRA for retirement saving, what restrictions do I need to consider?

A. IRA is not for everyone, if you fall into any of the following conditions, it is not for you:

1. Married but filing tax separately
IRS has strict rules about couples married but filing tax separately, your income needs be lower than $10,000 in order to enjoy the tax-deductible benefit provided by IRA.

2. Couples with high income
If you are married and file tax jointly, when your income reaches certain limit, you cannot enjoy the tax benefit from IRA.  This limit adjusts each year, so please check IRS website by yourself for the latest number.

3. You have access to 401(k)

If your employer provides 401(k), you can't have much benefit by opening an IRA account.

0 Comments

Which Factors Affect Credit Score and To What Extent?

9/25/2013

0 Comments

 
Picture
Factors that affect your credit score:
  • New late payments can drop scores over 100 points.
  • Short sales can also drop a credit score over 100 points.
  • Even a collection account with a small balance can cause a credit score to drop.
  • Joint account holders share ownership of the account and both are liable for repaying debt. If there is any delinquency, this would report on both credit holder’s accounts.
  • Credit history looks better if you have long-standing, established accounts. The older the age of the account, the better it is for your score.


How long information remains on your credit report:

  • Bankruptcy- 10 years
  • Late payments, foreclosures, collections, and public records- 7 years
  • Good closed credit – can be removed after 2 years

How different types of credit are defined:

  • Revolving Credit is any credit that consumers can charge up to the limit and pay the minimum payment; such as credit cards and home equity lines of credit.
  • Installment credit is any loan, excluding mortgages, that has the same monthly payment amount throughout the life of the loan; such as a car or student loan.


AnnualCreditReport.com allows you to request a free credit report, once a year from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. Click here to get your free credit report: https://www.annualcreditreport.com/cra/index.jsp



0 Comments

Banner and William Penn Are the Same Company - LG America

9/25/2013

0 Comments

 
Picture
Depending on which state you are in, many people who shop for Term insurance know Banner or William Penn (NY State) are the most competitive Term life providers, but do you know they are really one company - Legal & General America?

Best of all, all of its Term life policies come with a little known free benefit - MediGuide Medical Second Opinion which could potentially save you lots of money.

See the attached brochure for details.

banner_brochure.pdf
File Size: 269 kb
File Type: pdf
Download File

0 Comments

Digital Estate Planning Will Be Increasingly Important Going Forward

9/24/2013

0 Comments

 
In addition to the regular estate planning, you also need to consider your digital asset's estate planning.  The chart below will give you a clue about where to start.
Picture
0 Comments

What's the Best Time to Collect Social Security Benefits for Married Couples?

9/24/2013

0 Comments

 
Picture
Q. I am married and considering taking social security benefits.  Is the best time to do so different from if I were single?

A.
Deciding when to collect get a little more complicated if you're married. When a married person claims benefits, you're eligible for what you've earned or up to half of your living spouse's full retirement benefit, whichever is higher. 


A low earning spouse who is relying on spousal benefits takes an even bigger early claiming hit than a primary wage earner -- if he or she claims benefits at 62, they get just 35 percent of the primary earner's full retirement age check, instead of 50 percent. On the other hand, there are no extra benefits for waiting past full retirement age to claim that spousal check. That means this is the one case where no matter how you slice it, waiting past the "full retirement age" of 66 doesn't net you an extra dime.

The catch is that a spouse can't claim benefits until the earner makes a claim. So let's say a high-earning husband and non-working wife both turn 66 this year. The best financial plan is for the husband to begin claiming his benefits so his wife can collect. 


But not so fast!  

We know that the husband will receive a bigger benefit if he waits until he's 70. He can still wait and cash in on that delayed payday by requesting that his claim and his benefits be immediately suspended. That way, he then can continue to wait for a bigger benefit, while his wife is now eligible to claim her spousal benefits.

It's tricky, but if you familiarize yourself with the basic rules, you'll be okay. 


Another thing to remember for married people: If one partner dies, the survivor can claim the deceased spouse's check instead of his or her own, assuming the deceased spouse's check is bigger. The general rule of thumb for married couples is that at least one partner (usually the higher earning one) should delay benefits well past 66. This is "longevity insurance" for you both.

One final thing to remember: Regardless of when you take Social Security and when you stop working, you need to enroll in Medicare when you first become eligible at 65, or you could face financial penalties in the form of higher premiums.


0 Comments

When Is Not a Good Time to Save 401(k) Money

9/23/2013

0 Comments

 
Picture
Q. Financial advisors often recommend maximizing 401(K) contribution. I wonder when is not a good time to save 401(k) money?

A.
We talked about the flaws of 401(k) in this blog post.  Now I will discuss a few situations saving for 401(k) is not ideal:

Situation 1. If your future tax will stay the same

Basically, if your tax rates remain the same, a regular 401(k)—with or without matching—always beats investing in a taxable account, thanks to its tax advantages.

An example

Suppose your current and future rates for ordinary income and capital gains are 25% and 15% respectively.  Further, suppose that you can either invest $100 in an IRA or $75 in taxable account.  Assume that the stocks return in appreciation and dividends 10% in the first year.  In the IRA, you have $110.  After paying $27.50 in taxes, you will have $82.50 after-tax money.

In the taxable account, you invested $75 after paying $25 in taxes. If you pays $1.13 in taxes on the gain and dividends of 7.50, your are left with $81.38.  Although you will pay more in taxes with the IRA ($27.50 instead of $26.12), you will be left with more ($82.50 instead of $81.38). The additional accumulation increases with longer horizons and higher tax rates on assets in the taxable account.

Situation 2.  If your future tax will increase

It's a no brainer in this situation - if your future tax rate will be higher, you don't want to contribute to 401(k) which gives you less tax benefits now.

Situation 3. If you need access to the money before retirement time

401(k) account comes with the IRS-mandated early withdraw penalty. However, if you contribute to Roth 401(k) or a Roth IRA (if you quality), you can withdraw contribution penalty free.

Situation 4. You don't want to take money out of 401(k) later

401(k) account comes with IRS-mandated required minimum distributions (RMDs).  The IRS requires you to take RMD when you reach age 70½. You may, for example, wish to self-fund long-term care and will want to keep aside a significant stockpile of assets to fund that potential liability. If your money is in a Roth IRA account, there is no such RMD requirement.


Situation 5. You don't have employer match and faces hefty 401(k) account fees


If you don't get any employer match and the fees and fund choices of your 401(k) account are prohibitive, it's probably more economical to contribute to an IRA account.

0 Comments

GIGO and a Good Broker

9/22/2013

0 Comments

 
Picture
Computer wonks like to talk about garbage in/garbage out (GIGO).  A simple example: if there's a mistake in the way a blog post is encoded, many XML/RSS readers will choke on it, preventing all future posts from showing up.

The work of the middleman, such as an insurance broker, is to inspect and recover. 


If you have a restaurant and get lousy fish from the boat, you don't get to serve it and proclaim garbage in garbage out.  No, your job is to inspect what you get, and if necessary, change it.

If the school board gives the teacher lousy instructions, the teacher can easily put up his hands and say, "I'm just doing my job." The great teacher doesn't do that, of course. He provides a buffer between the administrators and the his real customers, the students.

There will always be garbage in. It's up to the middleman as to whether or not there will be garbage out.



0 Comments

When Is The Best Time To Collect Social Security Payment?

9/21/2013

0 Comments

 
Picture
Q. When is the best time to start collecting social security benefits?

A. There is no definitive answer, but there are a few guiding rules. 

First, if you're still working, don't claim benefits before your full retirement age. 
This is the rule thumb that nearly every expert can agree on. You shouldn't claim early while you're still employed unless you truly need the money to survive, because it comes with hefty penalties. 

Until you reach the full retirement age, for each $2 you earn in 2013 above $15,120, you lose $1 of your annual Social Security benefits. By contrast, after 66, benefits don't get cut no matter how much you earn. If you're working, try to wait. Also, don't take the money early thinking you'll make more by investing it: If you invested the money, you would need to earn more than 7 percent annually to equal what you'd make by delaying benefits until full retirement age.

Next, don't take Social Security until you're sure you want it. 

Up until December 2011, the Social Security Administration had a "do-over" strategy that had allowed seniors to file for benefits and then later repay them, without interest, to get a bigger check. In effect, you got eight years -- from 62 to 70 -- to change your mind about taking early benefits. You could even use a do-over as a way to get an interest free loan from the government. But since December 2011, you have only 12 months to change your mind after initially filing for benefits.

Finally, figure out your average life expectancy. 

A woman turning 62 this coming year will live to an average of 85.5 and a man of the same age to 83.4. But what about your health and your genes? There are a bunch of websites that calculate your life expectancy while taking into account your health, family history, exercise, eating, drinking and driving habits and even social relationships. If you're not in great health and you want to get some of your tax dollars back, it can make sense to start claiming Social Security as early as possible.


0 Comments

5 Common 401(k) Mistakes to Avoid

9/20/2013

0 Comments

 
Picture
1) Not enrolling at the earliest opportunity
After joining a company, many people think they are not at the company long enough to qualify for 401(k).  They end up delaying a few years then enroll.  The problem is they've lost out on matching contributions (assuming their employer matches) and on the tax-deferred gains on funds they could have saved and invested.  Changing jobs five to seven times over a working career (which is typical) only compounds this mistake.

2) Not increasing contributions
Study shows the average contribution percentage for workers saving in a 401(k) is around 6 percent. Most studies indicate that workers without a pension will need to save and invest 10 percent or more every year into a 401(k) type retirement plan. These assets combined with Social Security income should be sufficient for retirement. If you enrolled into your 401(k) with a six percent contribution percentage, increase this to at least 10 percent as soon as possible and work towards increasing it from there over time.

3) Not making catch-up contributions
If you are celebrating your 50th birthday this year (or a birthday over age 50), then you have some catching up to do - you can make additional contributions all year into certain tax advantaged savings plans and accounts. If your savings could use a boost, and you're 50 or older, then you'll want to take advantage of these opportunities.

In 2013 workers can contribute up to $17,500 annually into their employer sponsored 401(k) type retirement plans. But if you're over 50 at any time in 2013 (even if you turn 50 on December 31st 2013), you can contribute an additional $5,500 (which remains unchanged from 2012 limits) for a total contribution of $23,000.

4) Taking a 401(k) loan
Most retirement plan experts agree you should never take money from your 401(k) plan because you are taking money away from what you will need for a financially secure retirement. The biggest risk of borrowing from your 401(k) is that most plan rules require repayment within 30 to 90 days of leaving your employer. That's a disaster for someone who suddenly loses their job. If you don't have the money to pay off the loan it will be included in income as a taxable distribution. If you are under the age of 59 1/2 you'll owe a 10% penalty tax on top of applicable federal and state income taxes. If you don't have the money to pay the tax, the IRS can collect what you owe by deducting it from your remaining balance, virtually wiping out your retirement savings in the plan. Whether or not it's a good idea to take a withdrawal from your 401(k) account ultimately depends on what you are doing with the money, but for the reasons explained here, it's wise to avoid this move, as it can backfire.

5) Not running your retirement numbers
The time to find out you have not saved enough is not after you retire. Now is the time to do some serious number crunching. Calculating how much income your current retirement account and annual savings will generate at retirement is a critical step to ensuring you are on track to achieving your retirement income goals. If your retirement plan offers access to online tools to do this, use them.



0 Comments

Best Time to Buy Electronics, Jewelries, and Books

9/19/2013

0 Comments

 
Picture
Q. Many websites use dynamic pricing method, what is the best time to shop for certain items?

A. Depending on what types of merchandise you are shopping for, there are different days/times to get the best prices, below is a summary based on some online statistics.

1. Electronics
The best time to shop electronic items, such as computers, laptops, cameras, TVs, games, etc. is beginning of the week.  The worst time is Friday.

2. Jewelries
Weekday time is the best time to shop jewelries, because many of the targeted female shoppers have the time to carefully shop and compare prices, retailers know this and they will try to present their best prices.

3. Small appliances
Sunday is the time when most consumers google the small appliances for household uses, you will likely find the best deal on Sunday for these items.

4. Books
Saturday is the best time to buy books, maybe this is when people start having time to relax and read? 

0 Comments

Financial Considerations For People Considering Re-marriages

9/19/2013

0 Comments

 
Picture
Q. I am divorced right now but considering marrying again, what financial factors should I consider?

A.
For people considering second marriages, financial considerations maybe more important than emotion considerations.  Here are a few major factors to consider:
1. Loss of alimony

If you marry again, you will lose the payment from your previous spouse.  Ask yourself if you do need this money for your living expense or retirement.  Some states even allow your previous spouse to stop paying alimony if you start living together with a new partner.

2. Kids college financial aid

College financial aid offices will consider both parents' assets and incomes, if you marry again.  For private colleges even consider your partner's income and asset, even you are not legally married yet.

3. Social security payment
If you are enjoying the social security payment of your previous spouse, if you marry again, this income source will stop.  The only exception is if you remarry after age 60, and your previous spouse has died; or your second marriage ends again, then you can continue receiving the social security payment.

4. Estate planning
Make sure talk to a lawyer about anything might impact your estate planning if you marry again.



0 Comments

Individual 401(K) FAQs

9/15/2013

0 Comments

 
Picture
What's an individual 401(k) plan?

The individual 401(k) - also known as the solo 401(k), works much the same as traditional 401(k) plans offered by large companies, as well as SEP IRAs designed for the self-employed.

Unlike other retirement plans, though, an individual 401(k) is strictly for sole proprietors who have no employees (although your spouse may contribute if he or she earns income from your business).

The individual 401(k) comes in both a traditional and Roth version, just like IRAs. With the traditional individual 401(k), you put away money on a pretax basis and it grows tax-deferred. Your money is taxed when you withdraw it, in a future that may well include higher tax rates.

If you opt for the Roth version, you put in after-tax dollars and your money grows tax-free - which means it is not taxed upon withdrawal. You can split your contributions between the two types of accounts. One other point: Unlike SEP IRAs, solo 401(k)s allow you to borrow against your savings.


When are individual 401(k)s a good deal?

These plans are ideal if you intend to sock away large sums. An individual 401(k) allows you to save for retirement both as an employer and an employee, often enabling you to contribute more than would be possible with other retirement plans.

Here's how: As an employee, you can stash away as much as $16,500. As the boss, you can contribute an additional 25% of compensation, up to a maximum of $49,000, including your employee contribution.

These contributions are discretionary, so you can save the maximum in flush years and nothing in tougher times. If you and your spouse are both in the plan and enjoy a banner year, you could save a total of $98,000. And if you are both 50 or older and eligible for catch-up contributions of $5,500 each, the total climbs to $109,000.

Who can contribute to one?

An individual 401(k) is strictly for sole proprietors who have no employees (although your spouse may contribute if he or she earns income from your business).


When can I get access to the money?

Typically you need to keep the money invested in the retirement account until you reach age 59 ½. Withdraw money before then and you'll be hit with a 10% early withdrawal penalty, on top of the income taxes you'll pay on the withdrawal.

There are a few exceptions to the early withdrawal rule. Each plan's rules vary, but you may be able take money out of your retirement account penalty-free before age 59 ½ if you use it for:
  • Purchasing your first home
  • Expenses after the onset of a sudden disability
  • Higher education expenses
  • Payments you make to prevent eviction or foreclosure.
However, there are options for getting at the money if you really need to.


What if I need the money before retirement?

In general, the best solution is to take out an individual 401(k) loan, which uses the accumulated balance of the account as collateral. You can borrow up to half of the total balance on your solo 401(k), as long as the loan doesn't exceed $50,000. The remainder of your balance is still invested in your individual 401(k), with tax-deferred investment earnings growth. Loan payment plans vary by provider.

The alternative is to simply withdraw money from your individual 401(k). If you choose to do so before you are at least 59 ½, you'll typically owe a 10% early withdrawal penalty. You'll also owe income tax on the withdrawal - even if you hold a Roth 401(k). There are exceptions, however. The IRS allows the 10% penalty to be waived for certain "hardship withdrawals" such as permanent disability or large out-of-pocket medical expenses.


How should I invest the money?

When investing for a long-term goal such as retirement, you typically want to emphasize stocks, which have the best chance to generate returns that outpace inflation. Adding some bonds or cash to your mix can help reduce the overall volatility of your holdings. 


How do my withdrawals get taxed in retirement?

If you go with the regular individual 401(k) and put away money on a pretax basis, your money grows tax-deferred - but it is taxed as income when you withdraw it. If you choose to invest in an individual Roth 401(k), you put in after-tax dollars now but your money grows tax-free, so that you pay no taxes upon withdrawal.

The Roth version might make sense if you expect your tax bracket to rise sharply by the time you are making withdrawals. But the choice between a traditional 401(k) and a Roth 401(k) can be tricky, so get help if you need it.


Does an individual 401(k) plan make sense for me?

These plans are appealing if you intend to sock away large sums. But 401(k) plans require more paperwork than SEP IRAs. If your account balance exceeds a certain amount, you have to file a special tax return for the plan, which can add slightly to tax-preparation costs and hassles.

In addition, many of the firms that will help you set up a solo 401(k) account levy setup charges (typically $100 to $375, depending on the level of service and the size of your account) as well as annual fees of $10 to $250.


Who can help me set up and administer a plan?

Here's some advice to consider as you shop for a plan provider:
  • Check out investment options. Unlike corporate 401(k)s, which often offer dozens of funds from multiple fund families, many solo 401(k) providers restrict you to one fund group. 
  • Keep a lid on costs. Fees vary widely among 401(k) providers. Set-up charges and annual fees depend on the amount of advice offered. Many firms will waive some expenses for larger accounts.
  • Consider your borrowing needs. Although the law allows you to borrow as much as 50% of the assets in your individual 401(k) (up to a loan limit of $50,000), not every provider offers a loan option. While it's certainly not advisable to raid your retirement plan for cash, you may want the financial safety net that a loan feature provides.

Fidelity is a good choice for many people, visit Fidelity Self-Employed 401(K) Center for more information.

0 Comments

The Flaws of the 401(k)

9/14/2013

0 Comments

 
Picture
Q. I heard talking about scrapping the current 401(k) system.  Is the 401(k) really that bad?

A. How bad the 401(k) system is?  To begin with, barely half of the middle-income earners have 401(k), with their median balance in 2012 just $23,000.  Not surprisingly, 401(k) savings are clustered among hte ranks of the affluent, with 72% of total savings held by the top 20% income group.

If you work for a small or middle company, chances are you don't know how greedily the 401(k) admin fee is, with not much size to spread the cost, the average fee is close to 1% for plans with less than $50M in assets.

Worse, the fees are not always obvious.  Many retirement plans invest in so-called R shares, but they are not all created equal.  Look for higher numbers attached to the R, for example, R4 shares rather than R1, because the lower the number, the higher the fees.  If it's an R1, R2, or R3, you get the higher fees.  An 1% difference in fees between share classes can add up over a lifetime to $200,000 less in savings at retirement.

0 Comments

Where to Sell My Used Smartphone?

9/7/2013

0 Comments

 
Picture
Q. I want to buy a new iPhone, what options do I have with my current old iPhone?

A. If you want to dispose your current used smartphone, here are a few options:

1. Go to the following websites to evaluate the value of your used smartphone:
  • Gazelle.com
  • BuyMyTronics.com
  • NextWorth.com
  • Amazon Trade-in

2. If your used smartphone has an estimated value higher than $30, you can get a prepaid shipping label from these websites so you can avoid on shipping cost.

3. If you want to get cash offer for your used smartphone, Gazelle provides three options: Amazon gift card, Paypal payment or check.  Amazon Trade-in gives you points for shopping at Amazon.  NextWorth sends you a check, Paypal payment or a gift card.

0 Comments

Strategies to Minimize Tax Impact on Required IRA Withdrawal

9/6/2013

0 Comments

 
Picture
Q. I am about 70 1/2 years old soon.  I heard there would be mandatory withdrawal from my IRA account and I have to pay income tax on the withdrawal.  Is there any way I can minimize the tax on such withdrawals?


A. There is a required minimum distribution (RMD) for traditional IRA and 401(k) savings, there is no such requirement on Roth IRA.  Once you turn 70 1/2, you need to meet the RMD requirement before 4/1 of the next year, otherwise there will be penalty.


A little trick to minimize the tax impact is to start withdrawal before the end of the year you turn 70 1/2.  Because if you make the withdrawal between Jan 1st and Apr 1st of the next year, in addition to the first RMD, you are also required to make the second RMD before the end of the next year, which will drive up your taxable income for the next year!


If you plan to work after age 70 1/2 (hope not!), you can save the withdrawal to the 401(k) account provided by your employer, in this way, you can defer the tax payment.  Note this strategy only works for people who have high tax rate and don't need the IRA withdrawal money at the time.



0 Comments

Should I Select Target Date Retirement Saving Fund

9/5/2013

0 Comments

 
Picture
Q. My 401(k) fund choices include target date fund, should I put money into this fund?

A. A target date retirement fund fits many investors, because it automatically adjust investment portfolio to reflect the target retirement year and the associated investment objective.  However, it is not without shortcomings.

Its main drawback is higher expenses - based on Morningstar estimates, the average annual expense of a target date retirement fund is 0.91% in 2012, a lot higher than index funds.

As an investor, you can quite easily replicate the components of the target date retirement fund by allocating the right % of your retirement investment to the different domestic stock funds, international stock funds, bond funds, etc.  All you have to do is to read the target date fund's prospects and keep close track of its asset allocations each year, then invest on your own.  Of course you will need to do some homework, but you will save money year after year.

One more important thing to note - do not treat target date fund as one option, like other fund choices, and allocate your 401(k) money among target date fund and other funds at the same time.  If you decide to go with the target date retirement fund approach, put all your savings into it, otherwise, it will defeat the purpose of automatic portfolio adjustment towards your retirement date!

0 Comments

When saving for retirement is not for you?

9/4/2013

0 Comments

 
Picture
Saving for 401(k) is not always the best strategy, for the following several scenarios:
  • You don't have an emergency fund - you need to have about three to six months of income on hand, if not, save for this fund first!
  • You have debt with high interest rate - 401(k) won't do you much good if debt is eating away your money at the same time, pay off your high interest rate debts first!

Of course, if your company offers a general 401(k) match, by all means get it first!

0 Comments

Key Insurance Decisions for Someone Suddenly Becomes Single

9/3/2013

0 Comments

 
Picture
First, a key lesson for anyone who suddenly becomes single, whether through divorce or widowhood: avoid making financial decisions during an emotional time. 

Where to Put the Death Benefit Payment?

Beneficiaries of their deceased spouses' life insurance typically receive the death benefit proceeds tax free.  One urgent question is whether to leave the death benefit on deposit with the insurance company. The advantages of this option are that the insurance company's "settlement account" will typically earn a higher interest rate than what you will earn at your local bank.  The insurer will also issue a checkbook for the surviving spouse to draw on the account as often as necessary.

Increase Insurance Coverage or Not?
If you still have children who are financially dependent on you, it's advisable to either purchase or increase your life insurance coverage.  But remember that this need may diminish when the children are self-supporting adults, so consider term insurance as an option for this part of your insurance portfolio.

Changing Beneficiary Designation or Not?
If you become single due to divorce, you'll want to think about changing your beneficiary designation on life insurance policies. If your divorce agreement requires it, you may also have to purchase life insurance to provide funds for support of any minor children.



0 Comments

Is It a Good Idea to Put Retirement Money in IUL?

9/1/2013

0 Comments

 
Picture
Q. I have no company match for 401(k) contribution, is it a good idea to put retirement money in "index universal life" instead of 401(k) account?

A. For most working families, it is not a good idea to use life insurance - any kind of life insurance - for retirement saving.

It is much less costly to invest for retirement separately, and then, if you do need life insurance, purchase the least expensive form of life insurance - term insurance.

Given that you are not getting a company match, you might consider focusing on funding a Roth IRA first, while your contribution won't lower your taxable income for the year of the contribution, withdrawals from your Roth IRA will be 100% tax-free in retirement.

0 Comments

What Happens to 529 Fund If My Child Receives a Scholarship?

9/1/2013

0 Comments

 
Picture
Q. Can I get the money out of the 529 without penalty if my child receives scholarship from a college?

A. When you take money out of a 529, earnings and contributions are withdrawn proportionately.  Usually, you'd owe income taxes and a 10% penalty on earnings that aren't used for qualified education expenses.  However, there are 3 options you can consider:

1. You can withdraw money from a 529 up to the amount of a tax-free scholarship without paying the 10% penalty. 

You still have to pay income taxes on earnings, but contributions can always be withdrawn tax- and penalty-fee. See whether your 529 administrator will let your daughter take the withdrawal herself, listing her name (rather than yours) on the Form 1099 that reports the withdrawal to the IRS.  She would then be responsible for paying the taxes, but that can help lower the tax bill because she’s likely to be in a lower bracket than you are.

2. Use the 529 money for other qualified expenses and avoid some of those taxes.
In addition to tuition, you can use 529 money tax-free for room and board, books and mandatory fees.  And if your child ends up going to graduate school, she or she can use the money for tuition, room, board, books and mandatory fees there, too (there’s no age limit for using the money).

3. Switch the beneficiary of the 529 plan to another family member who plans to attend college or graduate school.  

That could be yourself, your spouse, or any other child or grandchild.  You can even make one of your child's first cousins or another relative a beneficiary



0 Comments

    Author

    PFwise's goal is to help ordinary people make wise personal finance decisions.

    Archives

    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013

    Categories

    All
    Annuity
    Book Reviews
    College Finance
    Finance In Formula
    Financial Scams
    For Entrepreneurs
    Healthcare
    Insurance
    Investment
    Miscellaneous
    Real Estate
    Retirement
    Savings
    Savings Ideas
    Stock-ideas
    Tax
    Tax-related

    RSS Feed

Copyright © 2013 - 2022 PFWise.com, All Rights Reserved. 
IMPORTANT DISCLOSURES
PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
About Us | Contact Us 
中文