It’s Tax Time – do you know what your top “tax bracket” is? Why should you even care? If you know your tax bracket is, say 15%, and you work a lot of overtime, some of your overtime earnings could be pushed up into the 25% tax rate. Your realized “extra income” could be taxed at $25 for every $100 you earn instead of $15 tax on your base income.
As your income increases up to the highest tax bracket of 39.6%, more taxes are owed not only because of higher tax brackets, but also due to phase-outs of the personal exemption and many common deductions; the Alternative Minimum Tax (AMT); an increased capital gains tax of 20%, an additional 3.8% tax on investment gains to help support the Affordable Care Act (on top of the increased capital gains tax). And on and on…
The tax code is very complex and as your income increases, your personal finances, including taxes will become more and more complicated.
2016 started off with a thud: in December the Fed started what is expected to be the first in a series of interest rate increases China’s growth was faltering, oil prices were crashing, and the Eurozone was struggling with the massive influx of refugees . The market responded to the growing fear with a roughly10% drop, in what’s frequently referred to as a correction.
Let’s put that 10% decline in perspective. Over the past 7 years the S&P 500 has had 7 years of positive returns, more than recovering the horrific losses in 2008. Of these seven years of recovery, the S&P 500 had 5 years of double-digit returns. Market corrections are fairly regular and may indicate underlying problems – or may be an opportunity to capitalize on opportunities.
If you have a financial plan in place, follow the guidelines; if you don’t have one, why not? It could help put you at ease when the going gets tough.
Thinking of borrowing from your 401(k)? Mary was interviewed by Emily Brandon, Senior Editor at U.S. News and World for this article which talks about avoiding some of the penalties and fees associated with taking loans or other early distributions out of a 401(k). Also see our last newsletter for more considerations before borrowing from your retirement plan.
Our best wishes to you and yours for happy holiday season. As you enjoy all the tasty treats, see our 2015 year-end newsletter to get some food for thought! Topics include:
- How to compare local hospital charges for common in-patient procedures.
- Considering taking a 401(k) loan? Be aware of the downside of “paying interest to yourself”.
- Will you live to 100? One estimate is that 1 out of 26 boomers will…will your money last as long as you do?
The Social Security strategy known as “file-and-suspend” was introduced in 2000 in the Senior Citizens Freedom to Work act and allowed suspension of benefit payments in order to accumulate more credits up to the maximum amount at age 70 while at the same allowing a spouse to claim “spousal-only benefits” and leave their own benefit to grow until age 70.
Update 12/27/15: “This strategy is only available for those who will have turned at least 62 by the end of 2015. Under the new budget this so-called loophole has been closed for those age 61 and younger.”
The decision of when to start taking Social Security benefits is highly personal –and critical. Depending on your benefit, longevity, and age when you claim your benefit there may be tens or even hundreds of thousands of dollars of benefits over your lifetime at stake. Investigate your options by working with a professional – fiduciary – financial advisor or do your own research so you understand what your lifetime benefit will be if you live into your 90’s.
Unsolicited mail, all those offers for credit cards and insurance can be a nuisance if you’re not in the market for these services. If you would like to opt-out for 5 years or even permanently, go to www.optoutprescreen.com. The Opt-Out website is operated by the major consumer credit reporting agencies. You’ll need to enter your birthday and Social Security number, along with address and phone numbers. If you choose to permanently opt-out, you’ll have to print and sign the election form, then mail it in. Note that you might miss an offer or something that you would actually like to have seen.
The dramatic swings on Wall Street over the past few weeks, including a 500+ point drop on August 24th, show markets flirting with a correction and even bear territory for some stocks. A correction is when the market drops between 10 and 20%; a “bear” market is called when the market drops more than 20%.
Corrections are fairly common and often considered a sign that the market had gotten bloated with some stocks having moved up with the momentum of the market, never mind the fundamentals. A correction allows the market to revalue stock prices more realistically and can create buying opportunities. So what triggered this sell-off? Two primary causes are China and the talk about the Fed raising interest rates with the China factor weighing the most. It wasn’t too long ago that China became the world’s second largest economy and there was even talk about China’s yuan overtaking the dollar as the world’s reserve currency. China’s growth has slowed considerably from 10.6% in 2010 to 7.4% in 2014 (http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG) and estimates of 6-7% growth for 2015. That compares to our weak annual growth rates of 1-2.5% since 2008. And when the Fed finally does raise rates it will actually signal that they have more confidence in the economy.
The bottom line is that a correction was bound to happen and many expected it much sooner than this. Trying to time the market is a gamble with the most likely outcome of selling low and buying high, the exact opposite of what investors intend. US-based corporations are generally in strong financial positions after having learned a valuable lesson from the financial crisis. Most investors also learned a valuable lesson – patience through the volatility.
Are “reverse mortgages” a good fit for you? Maybe you have seen commercials touting the benefits of reverse mortgages and wonder if it makes sense for you or loved ones. There were a lot of issues in the past with costs and unsuitable uses. Costs have come down and you may find that there are certain circumstances that reverse mortgages can be a strategic part of your retirement plan. There are criteria that must be met, including being at least 62 years old and owning your home outright or at least having significant equity in your home. Call us if you’d like to learn if this can – or should – be a part of your long-term plan.
Restricted Stock Units (RSU) are often a cornerstone in an employee incentive plan. Many Fortune 500 companies have been replacing other stock options such as Non-Qualified Stock Options (NQSO) and Incentive Stock Options (ISO) with RSUs. The tax characteristics varies among each of these plans. Contact us to work with a professional that has experience in the different plans to make the most of your benefit.
Are you making the most of your 401(k), 403(b) or 457 employer-based retirement plan? Employees under age 50 can generally contribute up to $18,000 and those age 50 and better can use the “catch-up” provision of up to $6,000 to boost their tax-deferred (or Roth) savings up to $24,000. Some plans also allow additional after-tax savings. In any case, make sure you are getting the full benefit of your employer’s matching funds. Beyond getting the full match, review your 401(k) plan expenses and fund options: in some cases you may be better off doing the rest of your saving on your own in IRAs, Roth IRAs or even taxable accounts.