Audience: Retirement Wellness Basics

Emergency Savings Plan – What’s your plan?

Posted on December 22, 2017 by -

Having an emergency savings account is critical for maintaining your financial well-being.

Many of life’s surprises come with a financial cost. But according to a recent survey, most Americans (61%) would not be able to cover $1,000 using some form of savings account.

Whether it’s a car accident, critical home repairs, or unforeseen medical expenses, being prepared with an emergency fund will help make sure you are prepared to successfully navigate what life throws your way. Having an emergency savings plan can also help prevent using high-interest credit cards, personal loans, or premature withdrawals from retirement funds. 

“Three months of salary”

There isn’t an exact amount to put aside for emergency savings. Some experts recommend three months of your salary, in case you lose your job or have to stop working for a period of time.

Where should I put this money?

When starting your emergency savings, your first question might be “Where should I put this money?” While hiding cash somewhere around the house won’t necessarily fail you, you might do better to put it in a secure savings account that is separate from the main place you store cash (such as your checking account). This way, the money can earn interest, and you’ll be less tempted to use it for non-emergency expenses. A good rule of thumb is to treat your emergency savings account like a bill, contributing a realistic sum to it every month. Over time, you’ll find that your emergency savings have grown into a comfortable fund that can help you weather some serious financial storms.

What about a Traditional IRA?

A Traditional Individual Retirement Account (IRA) is a great option for emergency savings. The balance of your IRA is always available to you in case of an emergency and the average annual growth of an IRA is greater than the average interest rate for a simple savings account. So your money can grow faster in an IRA, leaving you with an even greater cushion in case of an emergency. Since an IRA is an investment vehicle, it does carry more risk than a regular savings account, so it’s important to weigh this fact against the greater potential for growth.

https://www.bankrate.com/banking/savings/financial-security-0118/

 

Do you receive a Form 1099? What you need to know

Posted on December 22, 2017 by -

Whether you’re 100% freelance or have a side-hustle, if you perform work as an independent contractor, you’ll receive an IRS Form 1099-MISC from your client.

Filing taxes

The most common reasons you’ll receive a Form 1099-MISC are if you’re self-employed or work as an independent contractor. The IRS refers to this as “non-employee compensation,” and you’ll need to file taxes for this income.

Deductions

One of the nice things about filing with a 1099-MISC is that you can claim deductions when you file your income taxes (i.e. Form 1040 Schedule C). The deductions must be for business expenses that the IRS considers necessary and ordinary in your field but can include: office space (or a portion of your rent or mortgage if you have a home office), cell phone charges, equipment like laptops and printers, and mileage on your car. When you file your income taxes, you will subtract these deductions from your gross income to arrive at your net profit for your work as an independent contractor.

Business in your home

If you are using a dedicated part of your home for your business activities, you should be able to claim this expense on your taxes. IRS Form 8829 helps you determine what you can and cannot claim. See a tax advisor for any questions about deductions that may apply to your taxes.

Self-employment taxes

Generally speaking, self-employment means that you will be paying your Social Security and Medicare taxes. For people who are paid as an employee, these taxes are normally taken out of their paycheck and the cost is shared with the employer. But when you’re self-employed, you need to pay the entire amount of these taxes when you file your income taxes.

 

Paying taxes as an independent contractor

Posted on December 22, 2017 by -

Congratulations! You set up your business, you attracted clients, you completed the work, and you got paid. Now, it’s time to pay your taxes. Here’s what you need to know about paying income taxes as an independent contractor.

In addition to paying federal and state income taxes, independent contractors, the self-employed, freelancers, and anyone who receives a 1099 are also responsible for paying self-employment income taxes, i.e, Social Security and Medicare taxes. Employers take these taxes out of employee earnings as part of payroll and split the cost with the employee. But since you are self-employed, you’ll need to pay for 100% of the cost yourself. 

Social Security taxes

Social Security taxes are 6.2% for both the employer and the employee, but since self-employed people are actually both, their Social Security tax rate is effectively 12.4%. So if you make $40,000, you’ll pay $4,960 in Social Security taxes. Social Security taxes apply only to the first $127,200 of income, so you don’t have to pay these taxes on any money earned above that level. For example, if you make $140,000 in a year, you pay only 12.4% of $127,200 ($15,772.80), with the remaining $12,800 untaxed by Social Security.

Medicare Taxes

Self-employed individuals also have to pay the Medicare tax rate for both employer and employee. Unlike Social Security, there is no income cap to Medicare taxes, so you’ll pay on all money you make, no matter how much it is.

Business Expenses

Make sure to keep track of your business expenses, since these can be deducted from your income.

Business expenses are directly tied to the operation of your business. They can include supplies, travel, office space, and other expenses.

In addition to business expenses, self-employed people can also receive deductions for things like health insurance, retirement accounts, and professional services such as accountants and lawyers.

When to Pay

Some self-employed individuals have to pay these taxes in quarterly installments over the course of the year, while others file just once a year. IRS Form 1040-ES can tell you if you need to file quarterly, as well as the quarterly due dates that must be met throughout the year to avoid penalties.

You can also use this form to file your taxes for income from self-employment, and it has vouchers you can use to send money to the IRS. You can also securely pay these taxes over the Internet through the Electronic Federal Tax Payment System (EFTPS). To file annually, you must complete Form 1040-C. All of these forms, and additional information on how to pay self-employment taxes, can be found on the Self-Employed Individuals Tax Center on the IRS website.

 

What if I want to take money out before I retire?

Posted on December 22, 2017 by -

It can be tempting to take money out of your retirement account for an unexpected expense. But tapping into your retirement savings before you actually retire can put your financial security at risk. Here’s how.

You may need to pay an additional 10% in taxes.

Icon is an Individual Retirement Account (IRA), tax-advantaged retirement savings account regulated by the IRS. By law you can take money out at any time. However, the amount you take out will be included in your taxable income, and you’ll have to pay an additional 10% tax if you’re under age 59 1/2. That tax penalty is in addition to your normal federal and state income taxes.

There are notable exceptions to this rule.

There are multiple cases when you are exempted from paying penalties for early withdrawals. To be exempt from paying that additional tax, you must qualify for one of the following and complete IRS Form 5329:

  • Medical expenses that will not be reimbursed
  • Permanent disability
  • Beneficiary disbursements
  • Qualified higher education costs
  • First home costs
  • IRS levy
  • Qualified reservist early distribution

If your distribution falls into one of these categories, talk to a tax professional and be sure to use IRS Form 5329. The IRS provides more details here.

Why do I have to pay a tax penalty on money?

You may be wondering why you must pay an early withdrawal penalty on money that is rightfully yours. Well, the IRS provides you with tax benefits associated with retirement plans. As part of the agreement to provide you with these tax benefits, the IRS wants to ensure you keep the money in your retirement account unless it is absolutely necessary to remove it.

The less money in your account, the less it grows

Not only do you reduce your savings in your retirement account by the amount you withdraw, but you also cause the savings you leave in to grow at a slower rate. Why? Compound interest. If the market grows at 8% per year, and you have $100,000 in your account, you earn $8,000 in interest that first year and $8,640 in interest the year after (without adding any additional money), because you’re earning interest on your interest. 

Conversely, let’s look at what happens if you take money out of your account in the second year. If you started the year with $108,000 ($100,000 + $8,000 interest), and take out $10,000, you’re left with $98,000. On which you’ll earn $7,840 in interest. That’s almost $1,000 in fewer earnings in one year. Compound that over the life of your account and that equals a significant loss in savings.