Resource Type: Resource Post

Using your home equity–Things to consider

Posted on March 29, 2018 by -

The equity you have in your home can be one of the most important pieces of your retirement savings. Since it’s such a critical asset, borrowing against it should be considered carefully.

Taking out a home equity line of credit or a home equity loan can be a good way to access cheap credit or consolidate other debts, but it’s important to fully understand the associated costs and benefits. Both types of loans allow you to turn some of your home’s “equity” (the value of your home minus the amount you still owe on your mortgage) into cash. The less money you still owe the bank for your mortgage, the more equity you can turn into borrowable cash.

Many people take out home equity loans because the interest rates tend to be lower than for other forms of debt. However, home equity lines of credit and home equity loans differ sharply when it comes to interest rates and availability of credit.

Home equity line of credit (HELOC)

A home equity line of credit, or HELOC, functions like a credit card; meaning you can borrow when you want to, up to a defined limit. A HELOC also resembles a credit card in that the interest rate is “variable,” a term that should set off alarm bells when you’re considering a loan because it means your interest rate is subject to fluctuations and can suddenly increase.

A “variable” interest rate is one that fluctuates over time, unlike a “fixed” interest rate, which doesn’t fluctuate during the period of the loan. HELOC interest rates are considered to be variable and are usually determined by national financial “indicators” that have nothing to do with your financial history. 

The most commonly used indicator is the “U.S. Prime Rate,” which is adjusted over time. The prime rate is used by lenders to assess how much they should charge borrowers and is not related to your credit history. Lenders will also generally add their own rate on top of this. The unpredictability of these interest rates can make it harder for you to establish a consistent repayment plan, especially if you’re on a fixed income because you can’t simply set aside the same portion of your income every month.

A situation when a HELOC might make sense is for a home renovation. That way, you only draw the money when you need it to pay for materials or labor and aren’t paying interest on the total amount of the renovation for the entire duration of the project.

Home equity loan

A home equity loan is a one-time, lump-sum loan of a specific amount of cash that is to be paid back over a set amount of time. Home equity loans generally carry a fixed interest rate, so you can expect to pay the same amount every month. Home equity loan interest rates depend on a combination of your credit score and the housing market in which you live.

Another important factor when considering a home equity loan is how it will affect your credit score. Credit agencies treat HELOCs like credit cards, so a high balance can negatively affect your score. Home equity loans, however, are treated as “installment loans” (the same type of debt as mortgages or student loans) and do not affect your score.

Before you enter into a loan agreement for either type of credit, consider how they will affect your broader financial picture. 

A close look at Social Security

Posted on March 29, 2018 by -

Social Security is a critical source of income for many Americans in retirement. However, it’s not likely to cover all of your expenses. To make sure you have enough to live on, it’s a good idea to have other sources of retirement savings.

Understanding Social Security

Social Security was created as a mandatory, government-administered retirement and disability insurance fund for all Americans. Prior to its founding, retirees and the disabled relied exclusively on their own savings or the assistance of their families, exposing less-fortunate Americans to financial hardship. 

Social Security is funded through a tax on income that allocates money into the budget of the Social Security Administration, where it is then immediately paid out to citizens currently eligible for Social Security benefits. When the money produced by these taxes exceeds the amount needed to pay beneficiaries, the remainder goes into the “Social Security Trust Fund,” where it is invested to provide a fallback for years when participant revenues are not as high.

Who qualifies to receive Social Security benefits

The most common type of benefit received from Social Security is the retirement benefit. Individuals qualify for retirement benefits by earning “credits.” It normally takes 10 years working full-time to accumulate enough credits to qualify for this benefit; however, only those over 62 are eligible to receive it.

The amount an individual receives depends on when s/he chooses to start receiving benefits; payments will be higher the longer the individual waits to access them. Most Americans begin taking their benefits as soon as they turn 62. In fact, only 1.4% of men and 2.5% of women wait until they turn 70 to start taking benefits[1]. If a married person passes, the living spouse is eligible to receive the benefits of his/her partner in addition to his/her own. This is referred to as “survivor’s benefits.”

Individuals who have a physical ailment that is included on Social Security’s list of disabilities, who are at least 18 years of age, and have earned the required credits (around $52,000 in previous earned income), are eligible for Social Security disability benefits until they are able to return to work[2].

How you receive and pay taxes on Social Security payments

  • Social Security payments can be received through a direct deposit to your bank account or via a check sent to your home.
  • Distributions from your IRA don’t affect your Social Security disbursements. However, they can affect the amount of income taxes paid, which means that you may need to pay taxes on Social Security Benefit disbursements.
  • As of 2021, single filers with a combined income of less than $25,000 will not pay taxes on Social Security benefits. Those with a combined income between $25,000 and $34,000 will pay taxes on up to 50% of their benefits, and those making more than $34,000 will pay taxes on up to 85% of their benefits.
  • It works a bit differently for married couples who are filing jointly. If filing jointly, the couple must add together both incomes even if one isn’t receiving Social Security benefits. Couples with a combined income of less than $32,000 will not pay taxes on Social Security benefits. Those with a combined income between $32,000 and $44,000 will pay taxes on up to 50% of their benefits, and those making more than $44,000 will pay taxes on up to 85% of their benefits.

The future of Social Security

In theory, the Social Security program can fund itself indefinitely because the working generation is constantly producing enough money to support retirees and the disabled. However, as the retired population continues to grow exponentially relative to the size of the workforce, serious doubts about the program’s sustainability have emerged. While there are competing opinions on the extent of this problem, there is a consensus that future Social Security payments will not be enough to support coming generations of retirees unless there is significant reform.

Because retirement can create a vulnerable financial situation, investing in your retirement future is incredibly important. Social Security can be a helpful contribution to your retirement income, but it may not be enough to sustain your desired quality of life. You may want to view Social Security as an additional benefit and not a requirement when developing a retirement plan.

 

[1] https://www.fool.com/retirement/general/2015/02/22/the-average-american-takes-social-security-at-this.aspx
[2] https://www.ssa.gov/planners/disability/dqualify.html

Student loans feel like a weight

Posted on March 29, 2018 by -

Managing student loan debt can be challenging, but developing a repayment strategy based on your specific situation will ensure you build a secure financial future.

You are not alone!

Current estimates of American student loan debt put the total at over $1.3 trillion [1]. Doesn’t that sound like a lot of debt? That’s because it is. However, financing an education through student loans can also be an extremely valuable investment that qualifies people for high-paying, prestigious jobs that would otherwise be unattainable.

If you are feeling overwhelmed by student loan debt, here are some tactics to help you stay on top of your payments:

Things you can do: Actions you can take?

  • Make sure you understand your loan balances, terms and interest rates. 
  • Consider consolidating your loans if you have multiple or high interest loans.
  • Explore loan forgiveness. Some employment opportunities like teaching or public service offer the added incentive of loan forgiveness.
  • Make a budget and stick to it. Decrease your expenses wherever possible so you can both repay your loan and maybe even save a little money along the way.
  • If you can, pay extra on your student loans, as it will help pay down the debt faster.

Student loans are a unique form of debt that allow you to carry high debt levels with low minimum payments for a long period of time. However, just because you can stretch out the time frame for repayment doesn’t mean you should. The faster you can pay down your debt, the less interest on your loan will “compound,” and the less you will pay overall.

Use your IRA to pay off a loan

To be eligible to use an IRA distribution for higher education and get the 10% early withdrawal waived, expenses must be for yourself, your spouse, your child, or your grandchild. These funds can pay for books, tuition, and other qualifying higher education expenses, and students must be enrolled more than half-time at an eligible institution as defined by the Department of Education.

 

[1] https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#2c4774485dab

When can I use my retirement savings?

Posted on March 27, 2018 by -

The legal requirements. You can start taking money out of your Icon IRA at age 59 1/2 without paying the 10% penalty.

But at age 70 1/2, the IRS requires you to start taking minimum distributions (RMDs) from your IRA each year. This rule does not apply to a Roth IRA. You will also have to pay income taxes on the withdrawn amount since contributions to your IRA were made pre-tax. 

Calculating RMD’s. The RMD for each year is calculated by dividing the IRA account balance as of December 31 of the prior year, by the applicable distribution period or life expectancy. You can find more details on RMD’s by going to the IRS website: https://www.irs.gov/publications/p590b#en_US_2017_publink1000230736

A note about social security. The longer you can wait to take social security, the larger your monthly amount will be. Some experts recommend waiting until you’re 70 to help maximize your benefit.

To make changes to your Icon retirement plan go to click here.

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.