Archives for July 5, 2019

You’ve worked hard throughout your career to save for retirement so, of course, you want to make the most of your money. But when planning for retirement, many people don’t consider how taxes will affect their savings.

If you’re saving in a 401(k) or traditional IRA, your dollars are tax-deductible up front. But you will need to pay income tax on the withdrawals once you retire. If you’re already going to be stretched thin financially during retirement, giving a good chunk of your savings to Uncle Sam may make your golden years even more challenging.

Fortunately, by making a few smart and strategic decisions, there are a few ways to save on taxes in retirement.

1. Understand your tax bracket

Exactly how much income tax you pay on your retirement account distributions will depend on what tax bracket you fall under. By making withdrawals strategically from your 401(k) or traditional IRA, you can ensure you’re not paying more than you have to in taxes.

Tax Rate	For Unmarried Individuals, Taxable Income Over:	For Married Couples Filing Jointly, Taxable Income Over:
10%	$0	$0
12%	$9,700	$19,400
22%	$39,475	$78,950
24%	$84,200	$168,400
32%	$160,725	$321,450
35%	$204,100	$408,200
37%	$510,300	$612,350

So, for instance, say you’re married, and the two of you expect to need around $80,000 per year in retirement. If you withdraw exactly $80,000 from your retirement account, you’d fall into a higher tax bracket than if you could make ends meet on just $78,950 or less per year.

Keep in mind, too, that these brackets account for all taxable retirement income — which can include Social Security benefits. Exactly how much you’ll pay in taxes on your Social Security benefits depends on a variety of factors, but the bottom line is that your additional retirement income can potentially push you into a higher tax bracket. By taking all other sources of retirement income into consideration, aim to withdraw your retirement savings accordingly so you can stay within your ideal tax bracket.

2. Invest in a Roth IRA

All types of retirement accounts have their advantages and disadvantages, and one of the main perks of investing in a Roth IRA is that you can withdraw your money tax-free in retirement. Because your contributions are taxed up front when you put money into the account, you don’t owe any taxes once you make withdrawals.

A Roth IRA is especially helpful if you’re going to be stretching every dollar in retirement, because the money in your account is the amount you’ll actually be able to spend. In other words, what you see is what you get. Although you won’t get the up-front tax break when you make the initial contributions like you would with a 401(k) or traditional IRA, you will be saving money when you need it the most during retirement.

Another advantage of the Roth IRA is that you don’t need to start taking required minimum distributions (RMDs). With a traditional IRA or 401(k), once you turn age 70 1/2, you’ll need to start withdrawing money from your account whether you want to or not (because you haven’t paid taxes on this money yet, and the government wants its share eventually). This can be problematic if you plan to continue working past that age, because you may want to keep your money in your retirement fund until you actually need it so that it can continue growing for as long as possible. With a Roth IRA, there are no RMDs, so you can keep all the money in your account for the rest of your life if you choose.

If you’ve decided that a Roth IRA is the right move for you, it is possible to convert a traditional IRA into a Roth IRA — but be sure to weigh the pros and cons first. Once you convert to a Roth IRA, you can’t change your mind and undo the decision, so make sure it’s a smart move before you pull the trigger.

3. Consider moving to a more tax-friendly state

Sometimes, the place you call home can provide a tax break simply by living there. There are seven states in the U.S. that don’t have state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Also, New Hampshire and Tennessee don’t tax your earnings or other forms of income — just income from dividends and interest. So, if you’re living in any of these nine states, you may not have to pay much (or anything) in state income taxes.

Keep in mind, however, that you’ll still need to pay federal income taxes on distributions from your 401(k) or traditional IRA, so can’t avoid taxes altogether. But depending on how much you’re earning in retirement income and what your savings look like, saving a few thousand dollars per year on state income tax could help considerably.

Before you pack up and move, consider all the financial advantages and disadvantages of moving to a new state. You may save a considerable amount of money on taxes each year, but if housing prices and the general cost of living are higher, you may not come out ahead financially. That said, if you do your research and decide you can save money by moving to a more tax-friendly area, you may be able to live a much more comfortable and enjoyable retirement.

To some degree, taxes will always be unavoidable. But that doesn’t mean you can’t be strategic about your retirement decisions to save money. By considering how taxes will affect your retirement income and adjusting your retirement plans accordingly, you can save money and make the most of every penny.

China has sold the first tranche of a two billion yuan ($291.11 million) bond in Macau, which comes as the Chinese-ruled territory tries to diversify from its dominant gaming industry.

The Ministry of Finance said in a statement on Friday it sold 1.7 billion yuan of 3-year bonds at a 3.05% coupon to institutional investors on Thursday, ranging from pension funds to commercial banks, which were 3.2 times oversubscribed.

The ministry said it will sell the second 300 million yuan 2-year retail portion at a 3.3% coupon starting on Friday. Subscription to that bond will be open until July 19 according to Refinitiv IFR.

The issuance will help develop Macau’s bond market and financial services with its own characteristics, the ministry added.

Macau, which generates about 80% of government revenues from gambling, is considering launching a yuan-based stock market to help it diversify away from gaming, the city’s de facto central bank told Reuters last month.

It is also beefing up financial services under China’s Greater Bay Area plan to integrate the territory with Hong Kong, the largest offshore yuan hub, and nine mainland cities.

The former Portuguese colony will mark its 20th anniversary of return to Chinese rule in December.

Today’s gig economy is creating both opportunity and problems for millions of Americans. Gig workers include those who devote at least some of their time to providing ride-hailing services, short-term rentals of their homes or delivery services.

One powerful example is Uber. The ride hailing service, which launched its initial public offering earlier this year, said over 1.5 million active Uber drivers received more than $3 billion in payments in 2017. Active Uber drivers earn an average monthly income of about $364. Uber and other gig economy players such as Airbnb, Lyft and Doordash employ workers as freelancers or independent contractors.

They typically receive income that’s reported on Form 1099 for self-employed workers. And that usually means (unless they have another job as an employee at a company) they have personal responsibility for a lot of things, including saving for retirement.

The best retirement savings strategy for gig workers includes setting up a retirement plan that has significant tax benefits for the self-employed. Among those benefits: Contributions are deductible from your income, and the money saved in a retirement plan account grows tax-free. Also, if you’re the owner of a small business and you have employees, a retirement plan can help attract and retain them.

The self-employed can establish several types of retirement plans, but figuring out which is the best option for you can be confusing. Here are the four most common plans for the self-employed and guidance aimed at helping you decide which one is most suitable for you.

Payroll deduction IRAs

If you don’t want to set up a formal retirement plan, you can open an IRA. Any employees you have can open and contribute to their own IRAs through payroll deduction. As the employer, you can decide to make the IRA contributions for some of your employees and do so by increasing their pay by the amount you want to give them. This provides a simple and low-cost way to help employees to save.

It also allows employees to decide which type of IRA is best for them: a traditional IRA or a Roth IRA. The annual IRA contribution limits for this type of plan is $6,000 ($7,000 for employees age 50 or older). You can set up an IRA as late as the due date (plus extensions) of your income tax return for a specific year. 

Simplified employee pension (SEP)

A SEP IRA potentially lets you make a larger contribution than what’s allowed for a regular IRA. For 2019, you can contribute the lesser of 25% of pay or $56,000 ($62,000 if over age 50). So if your self-employed earnings are over $24,000 and you want to save more than $6,000 for retirement, a SEP IRA may be a better option than a regular IRA.

A SEP IRA is also a good option for a worker who has two jobs, one as an employee and another as a freelance side gig.

Here’s an example: Say a person has income from her work as an employee and income from working as a freelancer in the same year. In 2019, she can defer up to $19,000 ($24,000 including catch-up contributions) of her salary from employment (W-2 income) into her employer’s 401(k). If the employer also makes a contribution, the total SEP IRA contribution is limited to $56,000 ($62,000 if over age 50).

Since SEP IRA contributions are considered to come from her self-employed income reported on Form 1099, none of those contributions counts toward the $19,000 401(k) salary deferral limit, so she can contribute up to $56,000, or 25% of self-employment earnings, whichever is less, into her SEP IRA.

The downside of a SEP IRA is that if you have employees, you must contribute a uniform percentage of pay into a SEP IRA for each employee. Employees aren’t permitted to make their own contributions to a SEP.

Setting up a SEP entails no additional costs beyond contributions, and as the employer you can decide whether you make any contributions in any given year. A SEP for this year can be set up next year if you do it before you file your tax return.

SIMPLE IRA plan

This plan allows employees to contribute a percentage of their pay to an IRA and requires an employer to either match employee contributions dollar-for-dollar up to 3% of compensation or make a fixed contribution of 2% for all eligible employees, even if they choose not to contribute. A SIMPLE IRA plan is allowed for employers with 100 or fewer employees.

Other than the cost of making contributions, these plans also typically have no other costs to set up and operate. Like the SEP, a SIMPLE IRA can be established the following year while tax deductions for contributions can apply this year. 

Self-employed 401(k) profit-sharing plan

This is my favorite type of retirement plan because it allows the self-employed to make generous contributions both as an employer and as an employee. With this type of plan, you can make two types of contributions. One is a percentage of net profit (this is the employer’s profit-sharing component). The other is a fixed-dollar amount up to the employee 401(k) contribution limits ($19,000 or $25,000 for those over age 50 in 2019).

For an individual who declares about $75,000 net profit from self-employment, the total contributable amount for this plan is about $32,940. If you’re 50 or older, you can contribute about $38,940.

An self-employed 401(k) plan works best for a sole proprietor with no employees. That’s because if you have any employees age 21 or older and who work at least 1,000 hours a year, you’ll have to also open accounts and make similar contributions for them. Finally, you’ll need to establish a self-employed 401(k) plan before year-end to make a tax-deductible contribution for this year.

We often read that Americans spend too much and don’t save enough, so any news that U.S. adults are cutting back on purchases is a much-needed breath of fresh air. And apparently, one-third of Americans managed to reduce their spending this past year, according to a survey by CNBC and financial app Acorns in partnership with SurveyMonkey.

When asked what prompted them to cut spending, most folks who did so said it was because they had lost a job or other source of income. The second most-common reason was new debt (and, presumably, a desire not to add to it). And for some, the inspiration to reduce spending was none other than fear of a possible recession.

You don’t need a specific reason to spend less. The lower your bills and expenses, the more you’ll have left to save for important things like emergencies, retirement, college, or other goals. But if you’ve struggled to slash your spending in the past, here are a few tactics to do better.

1. Follow a budget

It’s hard to cut back on spending when you’re not actually sure how much your various bills or expenses are in the first place. To remedy this, carve out some time to set up a budget. To do so, comb through your bank and credit card statements from the past year, see how much you spend on average across various expense categories, and compare those numbers with what you bring home in your paychecks. From there, you’ll be able to see how much you can reasonably save by cutting back.

For example, imagine you typically spend $300 a month on restaurants and takeout meals. Once you see that number in front of you, it might jog something in your brain that makes you realize, “Hey, I can lower that figure to $150 and still enjoy good food here and there.”

2. Don’t shop for fun

For some people, shopping is a necessity. For others, it’s entertainment. If you fall into the latter camp, you’ll need to change the way you think about shopping if you’re serious about spending less.

You can accomplish this in a number of ways, but a good place to start is by not allowing yourself to shop online unless it’s for essentials you use regularly. For example, if you use the internet to buy things like toiletries and cleaning supplies because you’ve found a cheap source, no problem. But don’t browse retail sites at night or on the bus ride home from work because you’re bored. Instead, read a book during your commute, or take up a hobby that keeps you busier during evenings.

Furthermore, make going to stores a chore rather than a fun outing. Create shopping lists and don’t stray from them. This way, you’ll learn to associate shopping with getting things done, as opposed to an activity you do for enjoyment.

3. Hide your credit cards

Credit cards make it easy to spend, because you don’t have to worry about having physical cash on hand to pay for things. If you want to start spending less, remove the option to make unplanned purchases by shopping only with cash, and bring just enough money to buy the things you intended.

For example, if you’re heading out to buy milk, eggs, and a pair of socks at your local superstore, a $20 bill should more than cover those items. If you only bring $20 with you and leave your credit cards at home, you won’t have the option to buy the $80 gadget that catches your eye as you walk in.

Slashing your spending is a good way to buy yourself more financial security, no matter what life throws at you. If you’ve had a hard time cutting back in the past, use these tricks to curb your spending — and boost your cash reserves.