penalties

6 Monthly Bills That Won't Affect Your Credit Score

Dan Rafter — Tue, 19 Jun 2018 08:00:30 +0000

What's the best way to keep your FICO credit score healthy? Simple: Pay your bills on time and don't rack up too much debt. Some bills, though, are more important to your credit score than others.

In fact, you might be surprised to learn that many of the payments you make every month have no direct impact on your traditional FICO credit score. That's because in order for a payment to boost your score, or a late payment to hurt it, it must be reported to at least one of the three national credit bureaus: Experian, Equifax, and TransUnion. And many of the companies and service providers you pay off each month don't do this.

That's a mixed blessing. Making a payment late to these creditors won't necessarily hurt your score — unless you pay so late that the bill is sent to collections. On the other hand, paying these bills on time won't help your credit score, either. (See also: 5 Money Matters That Won't Affect Your Credit Score)

Which bills are not reported to the credit bureaus?

There are six common monthly bills that have no direct impact on your credit score. They are:

Utilities.
Insurance payments.
Bills from medical providers.
Cellphone payments.
Cable service.
Membership to health clubs or gyms.

If you're a few days late in paying your car insurance bill, don't panic. Your misstep won't hurt your credit score, just as paying your bill on time won't help it.

But that doesn't mean you can just ignore the bill. There are other consequences for late payments. You might face late fees, penalties, or even the cancellation of service. Your auto insurer, for instance, might charge you an extra $25 if you make your payment after a certain date. Your gym might cancel your membership. And both of those scenarios are still not as bad as if your provider sends your account into collections.

That's because, while a biller may not report payments directly to the credit bureaus, if you miss too many payments, they might send a debt collector after you. Once your account falls into the hands of a collections agency, this will be reported to the credit bureaus. Having an account in collections can cause your credit score to tumble by 100 points or more. (See also: Here's What Happens to an Account in Collections — Even When You Pay Up)

What about rent?

Apartment rent is a more complicated issue. In most cases, the rent you pay each month isn't reported to the credit bureaus. Paying your landlord on time every month usually doesn't provide a boost to your credit score.

There is a movement, though, to change this. The theory goes that renters should be rewarded for paying on time, just as homeowners are when they pay their mortgage bill each month.

Some landlords have begun reporting rents to the credit bureaus. And if you want to report your own rent payments, you can sign up for a rent-reporting service such as Rent Reporters or Rental Kharma.

These services are limited. Both Rent Reporters and Rental Kharma, for instance, only report rent payments to one of the credit bureaus, TransUnion. You'll also have to pay for these services. (See also: 7 Ways to Rent An Apartment With Bad Credit)

Some alternative credit scores do include other bills

As lenders try to expand their market reach, some are looking beyond the traditional FICO score to so-called alternative credit scores. Some of these scores include your behavior with the bills listed at the top of this story, or your management of checking and savings accounts. The FICO Score XD, for example, is for people who have such thin credit reports that they're unscorable by traditional methods. It relies on a consumer's utilities, cellphone, and other bills.

The number of lenders who look at alternative credit scores is still in the minority. But if you're applying for credit and have a limited credit record, it never hurts to ask that a lender take into consideration your good payment history on other types of bills. (See also: How Alternative Data Can Help Those With Little or No Credit)

Monthly payments that always impact your credit score

Some of the payments you make each month will always be reported to the credit bureaus. It's important to pay these on time each month if you don't want your credit score to drop. They are:

Credit card bills.
Home equity lines of credit.
Mortgage.
Auto loans.
Student loans.
Personal loans.
Home equity loans.

Note that revolving credit accounts — credit cards and lines of credit — carry more weight in your FICO score than installment loans.

Also, a payment isn't reported as late to the bureaus until you miss it by 30 days or more. Your two-week delay on your credit card payment won't show up in your credit reports.

However, you'll still be charged a late fee for being even one day late. And every day that you delay payment, interest charges mount. So, it still benefits you to make your payments on time, or as soon after the due date as you can. (See also: 5 Simple Ways to Never Make a Late Credit Card Payment)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Pointless Fees That Are Sabotaging Your Budget

Carrie Kirby — Tue, 12 Jun 2018 09:00:30 +0000

When I read the word "fee," what I see is, "something you should have avoided paying." No one likes to pay fees, fines, service charges, or anything that sounds remotely like a penalty. While some fees are unavoidable — try taking a flight without paying the Passenger Civil Aviation Security Service Fee — there are plenty that you can sidestep by calling to complain, avoiding certain behaviors, or switching providers.

Of course, to get out of a fee, first you have to know it was charged. Here are the especially pointless ones you need to watch out for.

1. Digital equipment rental fees

A friend recently replaced her internet provider's outdated modem with one she bought herself. When she called to let the company know, they removed a $20 monthly equipment rental fee she hadn't even known she was paying. She just saved $240 a year!

2. Bank fees

Banks love to tack on fees. One of the most insidious is the overdraft fee, which kicks in when a bank allows you to take more money out of your account than you actually have, then charges you for the "privilege." The really devilish thing here is that if the bank doesn't cover the transaction — for instance, if you haven't opted in to the overdraft program — they will deny payment to the merchant and charge you a non-sufficient funds fee. Either way, you pay.

Other sneaky bank fees are account maintenance fees, which might kick in if your account falls below a certain balance threshold, or check writing fees, which can crop up if you signed up for an account that typically allows only a small number of transactions per month.

A few tips for avoiding bank fees: Use a credit card rather than a debit card to avoid accidental overdrafts. Keep an eye on your balance and know what checks are coming in. Keep a buffer of several hundred dollars in your account and set a text alert to let you know if your balance dips below it. Link your checking account to a savings account. Know the terms of your bank account.

If you do see a fee on your bank account statement, call the bank. They may agree to fully or completely reverse the charge, and at the very least, they can let you know how to avoid the fee in the future — for example, by changing account types. If you find yourself getting hit with a lot of fees, consider changing banks or switching to a credit union. (See also: Are You Paying These 6 Unfair Banking Fees?)

3. ATM fees

The average fee for using a cash machine not run by your bank has hit an all-time high of $4.69, according to Bankrate. This may not seem like a big deal until you consider the percentages here. If you withdraw $40 from an out-of-network ATM and pay $4 for it, that's like giving away 10 percent of your hard-earned money just for the privilege of using the machine.

To avoid this fee, always keep a little cash in your wallet in case of an emergency. If I find myself in a crunch, I stop at a grocery or drugstore and make a small purchase to get cash back. I'd rather pay $1 for a pack of gum with my cash than $4 for nothing. (See also: 8 Ways to Make Sure You Never Pay an ATM Fee)

4. Investment account fees

When you invest for retirement, you can expect to pay some fees, but plans and accounts with higher-than-average fees can sap your retirement income big time. There are the fees you can easily see: The average investment manager charges around 1 percent of your assets each year. But you may also be paying fees you don't know about, like load fees on the mutual funds your adviser is buying or excessive trading fees if your manager is moving your money around a lot.

To avoid excessive investment fees, consider a low-cost platform such as Vanguard target date funds or a robo adviser. If you're stuck with your company's 401(k) plan, study the fees carefully and complain to human resources if they're too high. (See also: Watch Out for These 5 Sneaky 401K Fees)

5. Foreign transaction fees

If you go overseas, you may find yourself hit with foreign transaction fees both while using your credit card and while withdrawing cash. The only way to avoid this is to do your homework before you go. There are a lot of credit cards that advertise no foreign transaction fees now, so if your card doesn't offer that perk, simply apply for one that does before your trip. Getting approved should only take a few days, and you can even pay extra for express shipping if you're leaving soon.

If your bank account charges foreign transaction fees, that can be harder to change, because opening a new account takes paperwork and time. If you have more than one account, check with all of them. Last time I went overseas, I learned that my credit union account doesn't charge the fee, while my regular checking account did. So I simply used the credit union account to withdraw cash on my trip. You can also ask your bank if there is a different account type you can switch to that doesn't charge the fee. (See also: 11 Ways to Avoid Bank Fees While Traveling)

6. Library fines

When my kids were little and liked to check out 10 picture books at a time from our local library, the books would end up mixed in with their personal libraries and I would forget we ever checked them out. We ended up running up so much money in fines that my library card was frozen.

A better way to operate is to set a calendar reminder on your phone for the day before books are due. Keep the receipt handy, or consult your online library account, so that you have a list of all the books you checked out. If none of that works, you may have to do what I did: Institute a "read them at the library only" policy for library books.

If you do let those fees add up, find out if your library has an amnesty or fee forgiveness day scheduled. Our local library sometimes forgives fines in exchange for donations to the food pantry. You can also let the library know if you have a financial hardship; as long as they get the books back, they may be willing to waive the fines. Finally, find out if your library offers fine-free cards for children.

7. Credit card fees

If you fail to make the minimum payment on your credit card, you will be charged not only interest, but also a late fee. While traveling last month, I missedpayments on two credit card accounts, each which only had a tiny amount of charges on them. For both, the fee was larger than the balance I'd failed to pay.

To avoid this, always make at least the minimum payment each month. Not only will this avoid this month's fee, but it will demonstrate a good payment record which will help if you ever do slip up. Because I'd had a perfect on-time payment record before this, both credit cards forgave my late payments and reversed the fees. (See also: 5 Simple Ways to Never Make a Late Credit Card Payment)

8. Credit report fees

It's a good idea to check your credit report regularly for accounts you don't recognize, accounts sent to collections without your knowledge, or other problems that could prevent you from getting a loan in the future. But you generally don't need to pay for this. Under the Fair and Accurate Credit Transaction Act (FACTA) all Americans are entitled to one free credit report a year from each bureau. (See also: How to Read a Credit Report)

9. Money transfer fees

Sending money to family or even paying bills if you don't have a checking account can run up large fees, but it doesn't have to be that way. There are now tons of ways to send money with no fee or only a small fee, using PayPal, Venmo, Apple Pay, or Square Cash. For PayPal, if you're not making a business transaction, make sure to choose the friends and family option so you're not charged a fee. (See also: 7 Modern Ways to Send Money to Your Kid)

10. Airline fees

We are in the era of a thousand airline fees, and it is annoying. Many of the so-called fees that airlines tack onto your bill are just price increases in disguise, while others are mandated by the government. But there are some that are often avoidable, such as phone booking fees, baggage fees, and ticket change fees.

To avoid a phone fee, book online whenever possible. If you are booking an itinerary that can't be booked online, such as using miles on partners for some airlines, remind the phone agent that your transaction can't be done online and they probably won't charge you the fee.

To avoid baggage fees, look into getting the airline's credit card; many offer a free checked bag and other privileges to cardholders. Another strategy is to bring a roll-aboard bag that fits within the airline's carry-on allowance. In my experience, passengers with these bags are often offered free checked baggage at the gate anyway. Finally, you can stick to airlines that don't charge a fee for the first bag or two, such as Southwest. (See also: 6 Ways to Save On Baggage Fees)

Avoiding ticket change fees can be both the easiest and hardest. When your plans don't change, or if you book with Southwest, it's easy to avoid. If you made a mistake on your booking or if plans change, these can be impossible to avoid. The best you can do is to check and double check your reservation within the first 24 hours, before the airlines are allowed to charge a fee.

Some airlines offer the chance to purchase a ticket with free changes for a higher cost. Naturally, on the flights when I paid extra for that privilege, my plans did not change. If your plans change unavoidably, you can try calling the airline or booking company to plead your case. If the change is due to a death, you'll be expected to produce the death certificate.

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This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Common Mistakes to Avoid When You Enroll in Medicare

Dan Rafter — Tue, 01 May 2018 08:30:19 +0000

If you're close to retirement age, you might soon be eligible for Medicare. The federal health insurance program is an important resource, helping you cover the costs of hospital stays, doctor's visits, and prescription medication. The challenge? Signing up for Medicare can be complicated. It's not unusual for new enrollees to make mistakes, and these mistakes can prove costly.

Your goal is to sign up for Medicare services on time and correctly to avoid financial hits. Here are some common mistakes to watch out for when enrolling in Medicare coverage.

Thinking you haven't worked enough to qualify

You might think that just because you haven't worked much, or at all, that you can't sign up for Medicare. That isn't true.

To be enrolled in Medicare Part A, you might hear that you need to rack up 40 eligibility credits by paying Social Security and Medicare payroll taxes. That comes out to about 10 years of work for most people. But this only means that you won't have to pay for Medicare Part A coverage, which covers medical services provided by hospitals. You can still sign up for Medicare Part A if you haven't worked long enough to earn those 40 credits. You'll just have to pay a premium.

Some people are automatically enrolled in Medicare Part B — the insurance that helps cover doctor visits, trips to the outpatient clinic, and any expenses for medical equipment — when they sign up for Part A (together, the two comprise Original Medicare), while others enroll separately. You don't need any work credits to sign up for Medicare Part B. You can qualify for this part of Medicare even if you've worked fewer than 10 years. You just need to be 65 or older and a U.S. citizen or legal resident who's lived in the country for at least five years. The same holds true for Medicare Part D, which covers prescription medications. As long as you already have Parts A and/or B, you can enroll in Part D. (See also: How to Make Sense of the Different Parts of Medicare)

Signing up too late

Medicare.gov is clear about the risks of signing up too late for Medicare. In many cases, you'll need to sign up for Medicare coverage during your seven-month initial enrollment period. That period includes the three months before you turn 65, the month you turn 65, and the three months after.

There is an exception: You can delay signing up for Medicare coverage if you have health insurance coverage past the age of 65 from an employer for which either you or your spouse still actively work. If this employer has 20 or more employees, you can delay Medicare enrollment until the job ends and not face a penalty. If your employer has fewer than 20 employees, you should sign up for Medicare when you are first eligible.

If you do sign up late — especially for Part B coverage — you will face a stiff penalty. According to Medicare.gov, your monthly premium for Medicare Part B will be 10 percent higher for each full 12-month period that you could have had this coverage but didn't sign up for it. And that penalty will last as long as you are enrolled in Part B coverage.

Here's an example from Medicare.gov: Say your initial enrollment period ended Sept. 30 of 2009. You didn't sign up for Part B coverage until the general enrollment period in March of 2012. Your Part B penalty will be 20 percent. That's because you waited two full 12-month periods before signing up.

There is a penalty for signing up late for Medicare Part A, too, if you don't qualify for premium-free coverage and instead have to pay. Again, your monthly premium might increase by 10 percent. You'll have to pay this penalty for two times the number of years you could have had Part A coverage but didn't sign up for it.

Again, here's an example from Medicare.gov: Say you were eligible for Part A coverage for two years before finally signing up. You will have to pay the higher premium for four years — twice the number of years in which you waited to enroll. (See also: 5 Common Medicare Myths, Debunked)

Skipping Medicare Part D

Medicare Part D helps cover the costs of prescription medicine. It's not free — you'll have to pay a monthly premium. Because of this, you might be tempted to skip this coverage, especially if you're healthy today and you don't take any medications.

Don't. You can't predict how healthy you'll be in the future. You can't predict whether one day you will need costly prescription medications.

Sign up for Part D coverage as soon as you are eligible. Like with Medicare Part A or B, if you wait too long — any continuous period of 63 days or more after your initial enrollment period ends, unless you have approved medication coverage from a different source — you will face a penalty added to your monthly fee.

Not understanding what open enrollment means

Medicare does offer its own open enrollment period, which runs every year from Oct. 15 to Dec. 7. If you are new to Medicare, though, this isn't when you must sign up. New enrollees get their own enrollment periods.

The open enrollment period starting Oct. 15 is reserved for those already receiving Medicare and who want to change their coverage choices for the next year.

If you are enrolling for the first time, you still need to sign up for Medicare sometime during your seventh-month initial enrollment period.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3 Financial Penalties Every Retiree Should Avoid

Matt Bell — Thu, 22 Mar 2018 09:30:19 +0000

Managing money effectively can be challenging enough, but paying unnecessary financial fines only makes it tougher — especially in retirement. Here are three hefty penalties many older people may face, and how to avoid them.

1. Failing to take RMDs

If you are age 70½ or older, have money in a tax-deferred retirement account, and fail to take your required minimum distributions (RMDs), you will owe a penalty equal to half the required-but-not-taken amount. You'll also have to catch up on the amount you were supposed to take and pay tax on that.

The potential penalty pertains to traditional IRAs and 401(k)s — any retirement account that enabled you to make tax-deductible contributions and defer taxes on investment gains. It does not pertain to Roth accounts.

You see, Uncle Sam wants his money, and age 70½ is as long as he's willing to wait. Even if you don't need the money, you have to start drawing it out of your account(s) and paying taxes on it or face the penalty.

To determine the amount of your RMD for a particular year, take the account balance at the end of the prior year and divide it by the distribution period from the IRS's Uniform Lifetime Table found in these IRS work sheets.

For the year you turn 70½, your RMD must be taken by April 1 of the following year. For all subsequent years, it must be taken by the end of the year. If you have multiple accounts, you must calculate your RMD for each one. For IRAs, the total distribution amount can be taken from just one of the accounts or spread out across all of them, and it can be taken as a lump sum or little by little throughout the year. RMDs from employer-sponsored retirement accounts or inherited IRAs must be taken from their respective accounts.

2. Claiming Social Security too early

If you claim Social Security benefits when you are first eligible at age 62, you will lock yourself in to the lowest possible monthly payments. For those born in 1960 or later, it will be about 30 percent less than if you wait until your full retirement age of 67.

The Social Security Administration's full retirement age chart has the details. Even better, check the actual benefit amounts you'll be eligible for at different ages by creating your own account on the SSA's site.

Some argue that by collecting even a reduced benefit beginning at age 62, that five-year head start is more beneficial than waiting. And it's true that there are some people for whom it may make sense to claim as early as possible. However, with longer life spans, waiting at least until full retirement age — and arguably, even waiting until the maximum age of 70 — will prove most beneficial for most people.

Plus, consider a married couple's situation in which the man is the higher earner. Because women tend to live longer than men, and because widows are eligible to replace their monthly benefit with their husband's upon his death, that's one more reason why a higher-earning husband may want to wait until he's eligible for his highest monthly benefit. (See also: 3 Reasons to Claim Social Security Before Your Retirement Age)

3. Missing the Medicare sign-up deadline

Medicare eligibility begins at age 65. If you claim Social Security benefits at least four months before your 65th birthday, you'll be automatically enrolled in Medicare at the appropriate time. However, if you hold off on Social Security until you're older than 65 but you want Medicare coverage, you'll have to sign-up for it within a seven-month window that begins three months before your 65th birthday month. Otherwise, you'll face two possible penalties — one for Medicare Part A (hospital insurance) and one for Part B (medical insurance).

Most people qualify for premium-free Part A coverage based on how much they or their spouse contributed to Medicare during their careers. However, if you don't qualify for free Part A coverage and don't sign up on time, opting for it later will cost you in the form of premiums that are 10 percent more expensive than they would have been otherwise.

Those higher premiums will be in effect for twice the number of years that you've been eligible for coverage. In other words, if you sign up at age 67 (two years past the age when you were first eligible), you'll owe the higher premiums for four years. Bottom line on Part A? Most people should sign up when they are first eligible.

The penalty for missing the sign-up window for Part B is even more significant — 10 percent higher premiums for as long as you have coverage. Plus, your earliest opportunity to sign up will be the next January-through-March period, with the policy going into effect on July 1, so you may experience a coverage gap.

Of course, a prime reason why you might want to opt out of Medicare Part B is that you're still working, have health insurance, and don't want to pay the additional premium.

According to Medicare, if your employer has less than 20 employees, you should sign up for Medicare Parts A and B when you are first eligible. It will become your primary health insurance, with any other coverage you have only paying expenses not covered by Medicare.

If your employer has 20 or more employees and you are covered by a group insurance plan, you don't have to sign up for Medicare Part B (if you do, it will become your secondary insurance). However, when you leave that employer, you'll have to sign up within eight months or face the penalty mentioned earlier. (See also: How to Make Sense of the Different Parts of Medicare)

Clearly, as you get older, certain birthdays aren't just causes for celebration. They're reminders to make careful decisions about your tax-deferred retirement accounts, Social Security, and Medicare.

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

11 Basic Questions About Retirement Saving Everyone Should Ask

Damian Davila — Tue, 13 Mar 2018 10:00:06 +0000

Saving for retirement is critically important — we all know that. But sometimes, the confusing details can throw us off course or prevent us from doing all we can to properly grow our nest egg.

Education is the best tool when it comes to most matters of personal finance. And for retirement planning, there are some facts everyone should know. It's time to ask yourself these questions and brush up on the basics of retirement savings.

1. When can I start contributing to a retirement account?

With a traditional or Roth IRA, you can generally start contributing funds as soon as the account has been set up. However, rules can vary for employer-sponsored 401(k) plans. Some 401(k) plans may have a waiting period ranging from six to 12 months to make your first contribution, while others may allow you to contribute immediately. It's a good practice to check all applicable rules for your workplace retirement plan at the time of sign-up and again during every open enrollment period. (See also: 8 Critical 401(k) Questions You Need to Ask Your Employer)

2. How much can I save in each type of account?

You can sock away the most money per year in a 401(k). In 2018, you can contribute up to $18,500 to a 401(k), and an additional $6,000 in catch-up contributions if you're over age 50. By comparison, you can only contribute up to $5,550 to an IRA ($6,500 if over age 50). Due to its higher contribution limits, a 401(k) is a very beneficial account for those trying to make up for low savings in previous years or those close to retirement age. However, if possible, having both types of accounts is the even better option. (See also: 401(k) or IRA? You Need Both)

3. Am I taking advantage of the company match?

If you're offered a company match, you must take advantage of it. And since 94 percent of Vanguard 401(k) plans provide employer contributions, chances are that you have access to a workplace savings plan with a matching formula.

A common formula for matching is $0.50 per dollar that you contribute up to 6 percent of your annual pay. This means that a worker making $50,000 per year could receive an extra $3,000 in employer matching contributions by contributing $6,000 of their annual salary into a 401(k). Some might say there's no such thing as a free lunch, but an employer match on your 401(k) truly is a freebie. (See also: 7 Things You Should Know About Your 401(k) Match)

4. What happens if I change jobs?

From the date that you separate from your employer, you should aim to decide what to do with your 401(k) balance within 60 days. The reason for 60 days is that this is the deadline to complete an indirect rollover into a new retirement account (if your employer were to cash out your entire balance and hand you a check) and pay back any outstanding loans on your 401(k) (if not paid, they become taxable income and may even trigger penalties).

Under most scenarios, you have six rollover options for your total vested account balance:

Keep your account.
Rollover account into a new or existing IRA.
Rollover account into a new or existing qualified plan.
Do an indirect rollover.
Request a full cash-out of your account.
Do a mix of the above five options.

5. Is it better to contribute after-tax or pretax dollars?

There is no right or wrong answer here, as either way offers a benefit. Contributing with pretax dollars (traditional IRA, 401(k)) allows you to reduce your taxable income by deferring income taxes until retirement, at which point you're more likely to be in a lower tax bracket. So, if you're expecting to be making more money now than you will be in retirement, you should contribute pretax money. This is the majority of American workers.

Workers just beginning their careers, workers in professions with a high upside income potential, and individuals expecting a large windfall, such as a family trust or inheritance, can greatly benefit from contributing after-tax dollars to a Roth IRA or Roth 401(k).

6. Can I withdraw money early from my accounts?

Early distribution rules vary per type of plan.

401(k)

Generally, you can only take money from a 401(k) plan early due to a hardship or extreme situation, such as avoiding a foreclosure, making a first-time home purchase, or an unexpected medical expense. However, rules vary per plan: Some plans may only offer you the option to take out a loan, while other plans won't allow you to withdraw money early at all. If you take a distribution from a 401(k) before age 59 ½, you become liable for applicable income taxes and penalties.

Traditional IRA

There are several instances in which you can take an early distribution from a traditional IRA without incurring a penalty. This includes unreimbursed medical expenses, health insurance premiums during unemployment, the purchase of a first home, higher education expenses, and others. (See also: 7 Penalty-Free Ways to Withdraw Money From Your Retirement Account)

Roth IRA

Early withdrawals on contributions from a Roth IRA can be made at any time without incurring taxes and penalties, since you have already paid taxes on the money. Withdrawing any amount that exceeds your contributions counts as earnings, and is therefore subject to tax and penalties. In order to avoid those taxes and penalties, your Roth IRA must be at least five years old and withdrawals must be used for a qualified expense, such as the purchase of a new home or a disability. Higher education costs are also exempt from penalties, but you must pay income tax on the withdrawals.

7. What are required minimum distributions?

Eventually, the IRS wants its money in the form of taxes on your retirement distributions. When you reach age 70 ½, you must begin taking required minimum distributions (RMDs) from your retirement plans. These rules apply to traditional and Roth 401(k) plans, as well as 403(b) plans, 457(b) plans, and traditional IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. If you fail to take your RMD, the IRS will take 50 percent of the amount you should have withdrawn as a penalty.

The exception to the RMD rule is the Roth IRA, which is funded with post-tax dollars. (See also: Which of These 9 Retirement Accounts Is Right for You?)

8. Are there any tax credits for retirement contributions?

Come tax time, eligible workers can claim the Retirement Savings Contributions Credit, better known as the Saver's Credit. Depending on your adjusted gross income (AGI), you can claim 50, 20, or 10 percent of your retirement plan contributions, up to $2,000 for single filers and $4,000 for married filing jointly. For example, a married couple with an AGI between $41,001 and $63,000 can claim 10 percent of their eligible contributions for the Saver's Credit in 2018. (See also: Dumb 401(k) Mistakes Smart People Make)

9. What is the recommended 401(k) portfolio allocation?

Here's some advice from one of the most successful investors of all time, Warren Buffett: Put 90 percent of your 401(k) balance in a very low-cost S&P 500 index fund, and the remaining 10 percent in short-term government bonds. Keeping true to his word, he has included this very same advice in his will. (See also: Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments)

10. What is an HSA?

Those with a high deductible health plan (HDHP) are eligible for a health savings account (HSA), which is a way to make pretax contributions to save for medical expenses. Many HSA providers offer the option to put money in an investment account with several fund options, including mutual funds and low-cost index funds.

The main benefit of saving for medical expenses using an HSA is that you won't have to pay any income taxes on withdrawals used for qualifying medical expenses (even before retirement age). And when you do hit age 65, your HSA will basically become a traditional IRA. You can withdraw funds for any reason penalty-free, only paying income tax on the distributions. (See also: How an HSA Could Help Your Retirement)

11. Does my plan offer financial advice services?

More and more plans are jumping on the bandwagon of offering a robo-adviser (an automated service suggesting or performing certain types of transactions on your behalf). The range of trades that a robo-adviser can perform ranges from periodically rebalancing your portfolio to selling securities.

Fees can range, too: Some robo-advisers charge about 0.15 percent of your account balance or a flat monthly fee. Some plans may also offer you a-la-carte paid options to add a standard robo-adviser service. (See also: 9 Questions You Should Ask Before Hiring a Robo-Adviser)

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What to Do If You Get Audited

Mikey Rox — Tue, 27 Feb 2018 09:30:09 +0000

We often exaggerate the phrase, "My worst nightmare," but when it comes to getting audited, it's true. Audits are many people's worst nightmare — but they don't automatically have to mean financial disaster. To help navigate the unwelcome process, consider these important steps to take as suggested by tax professionals.

1. Don't panic

A lot of folks' first response to receiving their audit notice is to panic. Just the word "audit" has the ability to throw everything into a tizzy. But in all probability, if you've reported your taxes accurately (or at least tried to), the situation is likely not as bad as you think.

"It can be easy to fly off the handle and make what can be simple requests for information into a pressure-filled, stress-inducing scenario," says certified financial planner Joel Ohman. "This need not happen if you have someone — a CPA, tax attorney, or other trusted professional — representing you and counseling you."

Slow down, take a deep breath, and call whoever does your taxes. Trust them; rely on their advice.

2. Read the notice carefully

Take a good look at the audit notice you received. Many audits are desk audits or computer document-matching audits rather than the complete tax return audits done in-person.

"If the audit request is a document-matching audit, they will typically ask you to verify certain lines on the return," explains Grafton "Cap" Willey, CPA and managing director of the New England division of CBIZ MHM. "Very often they will propose an adjustment based on the information they have received. They will state that you reported 'such and such' and they have additional documents that they do not see reported."

3. Prepare the required documents

Documentation is the key to success in audits. Provide organized documents such as 1099s, K-1s, W-2s, and canceled checks, and reconcile them to the amounts claimed on the return. If you do not have adequate documentation, it's more likely that you won't get the deduction.

"IRS information is not always correct, so look it over carefully and make sure that they have the correct information," Willey adds. "Investment gains and losses are often misrepresented and very often the IRS will assume a zero-cost basis on unreported transactions. Providing corrected information will usually satisfy them."

When going through your documentation, if you come up with more deductions than you claimed, don't be afraid to submit them in your response. The IRS can be very strict on accepting documentation for charitable donations and business expenses, however.

4. Submit your documents on time

Don't make matters worse by missing deadlines. An audit is a serious matter that can result in heavy fines, and you don't want to put more stress on the process by being uncooperative. Follow the guidelines and get your documents submitted by the date expected. (See also: The Easiest Way to Avoid a Tax Audit)

5. Don't let your mouth get you in more trouble

The IRS is very good at making people feel nervous about being audited, and when people are nervous, they tend to ramble — sometimes to harsh consequences.

"Remember the IRS's job is to appropriate your money for government needs, and your job is to justify why you should keep the money yourself," explains CFP Brent Dickerson, owner of Trinity Tax Advisory. "They are not your friend, and they are not there to help you keep money for yourself; many people in an audit situation fail to remember this fact. They let down their guard and often say things that they don't even realize can bite them. Therefore, it's in your best interest to have a representative work on your behalf with the IRS."

6. Bring your CPA with you to your in-person audit

If the audit is an in-person audit, consider bringing along a tax professional to represent you at the audit.

"The IRS is not afraid to try to intimidate a taxpayer representing themselves," Willey says. "A tax professional that has experience with tax audits should be aware of the rules and know when the agent may be fishing for issues. Very often, giving a tax professional a power of attorney authority may avoid the taxpayer from having to sit down with the IRS agent, which many taxpayers would like to avoid."

Make sure your records are well organized and well documented; make it easy for the agent to follow. If they have confidence that you're presenting good documentation, they will be more likely to accept what is presented to them.

7. Don't be afraid to disagree and negotiate

Sometimes a tax audit is a negotiation — you may have to concede to some changes on smaller items in order to not have big changes on larger items. It really depends on the agent. Some agents nitpick minor items, while other agents go straight for the big issues.

"In my experience, IRS field agents tend to rigidly apply the law in favor of the Treasury," says Matthew T. Eyet, Esq. of Sandelands Eyet LLP. "If at the end of the audit you think the agent got it wrong, file a protest to take your case to the Office of Appeals where the appeals officers are typically more taxpayer-friendly in their analysis."

In addition, he adds, unlike field agents, appeals officers are allowed to consider the hazards of litigation when negotiating a settlement. This almost always means a better result for you.

8. Hire an enrolled agent if you're caught red-handed

If you've really dug yourself a hole and committed criminal acts by submitting fraudulent taxes, you'll need more than a CPA to help you. An enrolled agent is a tax expert and recognized by the IRS as having unlimited right of representation. They're your best hope of the least amount of recourse.

"If you are facing counts of criminal charges, you'll need a lawyer," says Dickerson. "If your business is being audited or if you have a sole-proprietorship with lots of accounting needs, then you may want to opt for a CPA. All of these professionals have their own specialties when it comes to tax and each is able to represent clients in front of the IRS — but only attorneys can represent in cases of criminality." (See also: 10 Reasons You Should Really Fear an IRS Audit)

9. Pay what you owe ASAP

You want this situation to be over, and the best way to accomplish that is to pay what you owe immediately. If you don't, you run the risk of added interest and penalties with late fees on top of that.

If you don't pay the balance in full in the first 21 days of receiving notice of what you owe (for balances less than $100,000), penalties begin accruing. The faster you can get this squared up and put behind you, the better.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Things You Need to Know About 401(k) Hardship Withdrawals

Dan Rafter — Tue, 23 Jan 2018 09:30:09 +0000

You know it's a bad idea to take money out of your retirement plan before you turn 59 ½ years old. Not only will you face hefty financial penalties, you're risking your financial stability in the future. But what if you're facing an economic hardship and you're in dire need of the money?

If you have a traditional IRA or Roth account, you can take an early withdrawal at any time. In some cases, you can even avoid the withdrawal penalty, if you meet certain criteria. It's harder, however, to withdraw money early from your current employer-sponsored 401(k) plan. You'll need to check if your plan allows for an early withdrawal. Some plans will only allow contributors to take out what are known as hardship withdrawals before you hit age 59 ½.

The bad news is there aren't many situations in which you can qualify for these hardship withdrawals. And of course, taking money out of your 401(k) plan early is never an ideal financial move. (See also: 5 Dumb 401(k) Mistakes Smart People Make)

Here are a few key things you need to know about hardship withdrawals.

1. "Hardships" have set definitions

IRS rules spell out a narrow list of circumstances in which you can qualify for a hardship withdrawal. If you want to use your money for anything other than these special cases, you're out of luck.

For all scenarios, there must be an immediate and heavy financial need to take an early 401(k) withdrawal. Acceptable scenarios include unexpected medical expenses, tuition and educational fees, and burial or funeral expenses. You can also qualify for a hardship withdrawal for costs related to purchasing a home, if your home is damaged and you need to pay for repairs, and to keep yourself from being evicted or foreclosed on.

2. Hardship withdrawals come with big penalties

If you do need cash quickly, your 401(k) plan might seem like a logical place. After all, the money in your plan is yours. But a 401(k) plan is supposed to force you to save for your retirement, not be a source of emergency funds. That's why most plans won't allow you to take money out of them until employment with your company ends.

Hardship withdrawals are the exception to this. But if you use this exemption to take money out of a 401(K) plan before you turn 59 ½, you'll be hit with penalties. First, these early withdrawals are taxed as ordinary income. Even worse, your early withdrawal will also be hit with a 10 percent federal tax penalty.

This makes withdrawing 401(k) funds early, even for a financial hardship, painful. If you have an alternative way to get the money you need, you should take advantage of it. (See also: How to Come Up With $1,000 in the Next 30 Days)

3. There can be penalty exceptions

That 10 percent penalty is harsh, but there are circumstances in which you might not be hit with it. You might be able to avoid that penalty if you are disabled or if your medical debt is higher than 7.5 percent of your adjusted gross income. You might also avoid the penalty if a court has ordered you to give the money from a hardship withdrawal to a former spouse, a child, or a dependent.

4. Not all plans allow for hardship withdrawals

Not all 401(k) plans have the option to take hardship withdrawals. Your employer decided whether it wanted to offer such withdrawals when it set up its plan. There is no requirement from the IRS that employers offer such an option.

To determine if your plan allows for these withdrawals, contact your plan administrator. In most companies, this will be someone in your human resources department.

5. There are limits to your withdrawal

Even if you quality for a hardship withdrawal, you can't take out an unlimited amount of money. IRS rules state that you can only take money from your 401(k) account if you have no other funds to cover your hardship. And then, you can only withdraw enough funds to cover the costs of your financial emergency. You can't take extra dollars for a financial cushion.

6. You may need proof of your hardship

Your plan administrator may require proof that you need to take the hardship withdrawal. This might mean you'll have to provide your administrator with copies of medical bills, repair bills, or an eviction notice. You might also need to provide copies of your bank account statements proving that you don't have other funds available to cover your financial emergency.

7. When the money is gone, it's gone

After you take a hardship withdrawal, you are typically forbidden to make any deposits into your 401(k) account for six months. Once that six-month period ends, you are allowed to start depositing money back into your 401(k) account as you had been doing before.

This brings up what might be the biggest negative to hardship withdrawals: The money you take out of your 401(k) plan is gone forever. It is not a loan. You aren't simply borrowing it and putting it back. This could really hurt come retirement time.

This is why you should search for other means to cover your financial emergency. Turn to hardship withdrawals only as an absolute last resort. (See also: 3 Sources of Fast Cash Besides Your 401(k))

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What Every Retirement Saver Should Know About Required Minimum Distributions

Emily Guy Birken — Wed, 10 Jan 2018 09:30:11 +0000

You may be aware of the fact that contributing money to a tax-deferred retirement account, like a traditional IRA or a 401(k), means you get to put money aside before it is taxed. This reduces your current tax burden and gives you a great incentive to save for retirement.

Unfortunately, Uncle Sam will eventually want his cut of that money. That's where required minimum distributions (RMDs) come in.

The good news is that you have until age 70½ before you have to worry about RMDs. But it's still important to understand how RMDs work and what to expect before you get to that age milestone.

What is a required minimum distribution?

Deferring taxes is great for the taxpayer, but the IRS can't afford for taxpayers to defer their taxes indefinitely. Individuals with tax-deferred retirement accounts have to actually withdraw money — and thereby pay taxes — or else those taxes will never get paid.

Everyone holding a 401(k) or IRA account (with the exception of Roth IRAs) must begin withdrawing money from those accounts during the year they reach age 70½. This ensures that account holders have enough time to allow their money to grow without permanently sheltering their money from federal taxes.

The IRS has established minimums that you must withdraw each year after reaching age 70½. If you fail to withdraw the proper RMD, you face a stiff penalty: The IRS will take 50 percent of the amount you should have withdrawn.

Calculating your RMD

It's also important to note that you are responsible for calculating and withdrawing the correct RMD each year — and the calculations aren't necessarily easy. Even if the custodian of your IRA or 401(k) does the math and paperwork for you, you are the responsible party in the IRS's eyes.

So how do you figure out your RMD? You need to start with three pieces of information:

Your date of birth.
The balance of each tax-deferred account as of Dec. 31 of the year before the year in which you turn 70½.
The IRS distribution table.

This IRS distribution table calculates your life expectancy based on your age. The table gives you a number that corresponds to the number of years the IRS expects you to live.

For instance, let's say a retiree was born on February 4, 1948, and will turn 70 in the first half of 2018. This retiree has a single IRA, with a balance of $250,000 at the end of 2017 (the calendar year before the year in which she turns 70½). To calculate her RMD, she'd look up her age (70) on the IRS distribution table to find the distribution period, which in this case is 27.4. She would then divide her IRA balance by the distribution period for her 2018 RMD:

IRA balance / Distribution Period = RMD

$250,000 / 27.4 = $9,214

To keep on the right side of Uncle Sam, she will need to withdraw a minimum of $9,214 from her $250,000 IRA in 2018. But remember, the operative word is "minimum." Account holders can always take more than their RMD if they choose to do so.

Why am I celebrating my 70½ birthday?

While 70½ may seem like an arbitrary number, there is a lot of thought put into this milestone age. The IRS makes a distinction between people born in the first half of the year, and those born in the second half. If your birthday falls between July 1 and Dec. 31, you don't officially have to take an RMD until the year you turn 71.

This means that those with birthdays in the first half of the year take their first RMD the year they turn 70, and those with the later birthday take their first RMD the year they turn 71 — which averages out to 70½. (See also: 6 Age Milestones That Impact Your Retirement)

Required beginning dates

To offer retirees a little more time to get their ducks in a row, the IRS does not require account holders to take their first RMD until April 1 of the year following the one in which you reach age 70½. That April 1 deadline is known as the required beginning date. The year in which that date falls depends on whether you have a birthday in the first or second half of the year.

So, our Aquarian born Feb. 4, 1948 will turn 70½ on Aug. 4, 2018. But remember, those born in the first half of the year calculate their RMD based on the year before they turn 70. So while she can wait to take her first RMD until April 1, 2019, at that point she'll calculate that RMD based on her age of 70 (which was her age as of Dec. 31, 2017), as well as her account balance as of Dec. 31, 2017.

The first year following the year in which you reach 70½ you will usually have two required distribution dates. Besides the April 1 date we just discussed, you'll also have to take another withdrawal by Dec. 31 of that same year. For our Aquarian, that means she will have to take a second RMD by Dec. 31, 2019. This RMD will be calculated based on her 2019 age of 71 and her account balance as of Dec. 31, 2018. This distribution catches her up on her requirements, and during all subsequent years, she is only required to take one RMD.

The required beginning date is similar for anyone with later birthdays. Let's say you're a Virgo with an Aug. 31, 1948 birthday. You'll turn 70½ on Feb. 28, 2019, which means you won't have to take your first RMD until April 1, 2020, and you'll calculate the amount based on your age of 71 (which is your age as of Dec. 31, 2018) as well as your account balance as of Dec. 31, 2018 — the year before you turned 70½. In addition to the April 1, 2020 distribution you will also have to take your 2020 RMD by Dec. 31, 2020, which you will calculate based on your age then of 72, and your account balance on Dec. 31, 2019.

Figuring out your required beginning date

If your birthday falls between Jan. 1 and June 30	If your birthday falls between July 1 and Dec. 31
Your required beginning date is April 1 of the calendar year you turn 71.	Your required beginning date is April 1 of the calendar year you turn 72.
You will use the age of 70 to calculate your first RMD amount.	You will use the age of 71 to calculate your first RMD amount.
Your second RMD is due by Dec. 31 of the calendar year you turn 71.	Your second RMD is due by Dec. 31 of the calendar year you turn 72.

How your RMDs are taxed

Since the entire exercise of taking RMDs is about making sure you pay the income taxes you owe, it's important to understand how your distributions will be taxed.

Your RMDs will be taxed as regular income at your applicable federal tax rate for the tax year for which you are making the withdrawal. This, in fact, may be the easiest-to-understand aspect of RMDs.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Get Health Insurance If You Missed the Open Enrollment Deadline

Kat Tretina — Wed, 03 Jan 2018 09:30:14 +0000

This year, the Open Enrollment period to sign up for a policy through the Health Insurance Marketplace was much shorter than in the past. The deadline for enrollment on the Federal exchange was December 15. (Many state run exchanges were open longer.) Previously, you had well into January to choose a plan. It's likely that many people were unaware of the change and missed their chance to enroll in an insurance policy.

Instead of taking the risk of going without insurance, there are a few alternatives to get some form of coverage after the Open Enrollment deadline.

1. Find out if you qualify for Special Enrollment

If you've experienced a major life event, you may be able to enroll in a plan outside of the Open Enrollment period. You can qualify for Special Enrollment in these situations:

You got married.
You had a baby or adopted a child.
You divorced or separated from your spouse and lost your insurance coverage.
You moved to a new home with a different ZIP code than your old residence.
You lost your job, either by resigning or being let go, and lost your insurance policy.

These life events must occur within the past 60 days for you to be eligible for Special Enrollment. If you do qualify, you can complete a questionnaire and choose a plan through a designated Special Enrollment section of healthcare.gov.

2. See if your parents' insurance will cover you

If you are under the age of 26, your parents may be able to add you to their own insurance policies. If their insurance is through an employer, they can add you during the plan's enrollment period. To do so, they just have to contact their insurance company. However, keep in mind that adding you to their plan will cause your parents' insurance premiums to increase, sometimes by hundreds of dollars a month. Make sure you and your parents are comfortable with the cost and discuss who is responsible for the additional fees.

3. Take on a part-time job

Another way to get health insurance — and boost your income — is to take on a part-time job. Some companies, including big names like Starbucks, Whole Foods, and Lowe's, offer comprehensive insurance benefits to part-time employees.

Some of them require you to work for a certain amount of time before you're eligible for benefits, but others allow you to enroll in an insurance policy on your first day. As an added bonus, your earnings from your part-time job can cover your share of health care costs and help bulk up your savings. (See also: 9 Big Companies That Offer Benefits for Part-Time Workers)

4. Research state or federal programs

All states offer Medicaid programs that provide coverage for millions, but the rules can vary from state to state. In general, Medicaid is designed for individuals who have a low-income, or are disabled, elderly, or pregnant. Children can also qualify for Medicaid coverage.

If you have children and they are not eligible for Medicaid, you may be able to get them insurance through the Children's Health Insurance Program (CHIP). Getting them coverage through CHIP, even if you go without insurance, can help you save money on their medical costs.

5. Get a short-term insurance plan

If you don't qualify for other forms of health insurance, one thing to consider is enrolling in a short-term plan. Short-term plans are offered by private insurance companies and provide coverage in emergency situations or catastrophic events. While not as ideal as having a regular health insurance policy, a short-term plan can be an important safeguard in a pinch. (See also: The One Time Short-Term Health Insurance Makes Sense)

If you don't know where to start, you can find short-term and catastrophic insurance plans by contacting an insurance broker. You can find brokers near you through the National Association of Health Underwriters database.

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6 Age Milestones That Impact Your Retirement

Emily Guy Birken — Wed, 23 Aug 2017 08:00:08 +0000

Legally significant ages seem to cluster early in life — you can drive at 16, vote, smoke, and enlist at 18, and drink at 21. After that, you might think that there are no more important age milestones to reach.

But there are more important milestones you'll reach as you near retirement. Here are the important ages that can impact your retirement, and the reasons why they were chosen.

Age 50 — Take advantage of catch-up contributions

IRAs and 401(k) retirement plans are tax-advantaged, which means you receive a tax-break by contributing to them. For traditional IRAs and 401(k)s, you contribute pretax income, which means you lower your overall tax burden for the year, and the money grows tax-free. With Roth IRAs and 401(k)s, you contribute post-tax dollars, and the money still grows tax-free. Since high income earners could potentially avoid paying any taxes at all if they simply contributed a large enough portion of their income, there are limits to the amount of money you can contribute each year. As of 2017, you can contribute an annual total of $5,500 to an IRA and $18,000 to a 401(k).

However, there is something called a catch-up provision for anyone over age 50. If you've reached your half-century mark, you can contribute an additional $1,000 to an IRA (for a $6,500 total contribution) and an additional $6,000 to a 401(k) (for a $24,000 total contribution). Taking advantage of these catch-up provisions can help you to make sure your retirement is more secure.

Age 59½ — Take penalty-free withdrawals from tax-sheltered accounts

Since you fund traditional IRAs and 401(k)s with pretax income, every withdrawal you make will be taxed at your ordinary income tax rate. But if you try to withdraw money from either of these types of accounts before you have reached age 59½, then you will also owe a 10 percent early withdrawal penalty on the amount you withdraw, in addition to the ordinary income tax.

You are not required to take withdrawals as of age 59½ — that is just the earliest age that you are allowed to do so without incurring a penalty.

You might be wondering why 59½ is the magic number. Congress decided to use this age because life insurance actuarial tables consider you to be 60 years old once you have reached age 59 and six months, and at the time that the rules were put in place, 60 was a relatively common age for retirement.

Age 62 — Take early Social Security retirement benefits

Social Security beneficiaries reach eligibility as of age 62. This is the very earliest that you can access your benefits from Social Security, although taking your benefits the moment you've blown out 62 candles is not necessarily a good idea.

Social Security changes the benefit amount based on whether you retire before or after your full retirement age. This means the longer you wait, the more money you will see in your benefit checks — to the tune of about an additional 8 percent per year. If you take benefits before hitting your full retirement age, your payments will be permanently reduced. (See also: 5 Questions to Ask Before You Start Claiming Your Social Security Benefits)

These early benefits have been around for quite some time. Early retirement at age 62 was introduced for women only in 1956, and the option was extended to men in 1961. Women were offered this benefit first because of the concern for widows without an income, although it became clear that men were also very interested in the option of taking early benefits.

Age 64 and 9 months — Enroll in Medicare

The initial seven-month enrollment period for Medicare spans from the three months before your 65th birthday, through the month of your birthday, and the three months following your birthday. Enrolling during this period means you will pay no fees or penalties for enrollment, and enrolling within the three months before your 65th birthday means that you will have Medicare coverage starting on the first day of your birthday month. Enrolling during your birthday month or afterward will result in a delayed start for coverage.

If you miss the initial enrollment period for Medicare, you can still sign up during the general enrollment period between January 1 and March 31 of each year, and your coverage will begin July 1 of that year. However, there is a late penalty for missing your initial enrollment period. For Medicare Part A, your monthly premium will increase by 10 percent for twice the number of years that you could have had Part A but didn't sign up.

If you miss the initial enrollment period for Part B, you will have to pay the late enrollment penalty for as long as you are a Medicare beneficiary. The monthly premium will increase by 10 percent for each full 12-month period that you were eligible for Part B but did not sign up.

Age 66 or 67 — Reach full Social Security retirement age

Your full retirement age is the point at which you receive your full benefits from Social Security. When Social Security was first enacted, 65 was chosen as the retirement age. In 1983, to deal with the coming demographic shift that would occur when baby boomers started to retire, Congress gradually increased the full retirement age from 65 to 67, based on birth year:

Birth Year	Full Retirement Age
1943-1954	65
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 and later	67

Age 70½ — Begin taking required minimum distributions

When you put money into a tax-deferred account like a traditional IRA or 401(k), you don't have to pay taxes on that money until you withdraw it. While this helps your tax burden during your career, you do need to remember that Uncle Sam will want his cut eventually.

This is why the IRS requires each account holder to begin withdrawing money during the year he or she reaches age 70½. There is a minimum withdrawal you must take, and failing to take out the minimum means the IRS will take 50 percent of the amount you should have withdrawn.

To figure out your required minimum distribution (RMD), you need to calculate it based upon the balance of each of your tax-deferred accounts as of December 31 of the previous year, and the correct IRS distribution table. These tables calculate life expectancy based upon your age and give you a number (corresponding to the number of years they expect you to live), by which you will divide your balance to determine your RMD.

It may seem that 70½ is an arbitrary number, but there is a lot of thought put into this milestone age. The IRS makes a distinction between people born in the first half of the year, and those born in the second half. If your birthday falls between July 1 and December 31, you don't officially have to take an RMD until the year you turn 71. This means that those with birthdays in the first half of the year take their first RMD the year they turn 70, and those with a later birthday take their first RMD the year they turn 71 — which averages out to 70½.

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5 Mortgage Details You Should Know Before You Sign

Dan Rafter — Fri, 04 Aug 2017 08:00:06 +0000

Taking out a mortgage is a big financial commitment. Not only are mortgage loans expensive, they also represent the biggest monthly payment for most consumers' budgets.

That's why it's so important to ask the right questions before signing the documents that officially close your mortgage. Here are five key questions you need to ask your lender when looking over your mortgage documents.

1. What are my closing costs?

Taking out a mortgage isn't free. Your lender and several third-party service providers will charge you what are known as closing costs, the fees you'll have to pay for your mortgage loan. You can expect to pay from 2 percent to 5 percent of your home's purchase price in closing costs.

This means for a home costing $200,000, you can expect to pay between $4,000 and $10,000 in closing costs. That's a lot of money, and often consumers roll the amount into their final loan, which can slightly increase their monthly payment.

Fortunately, uncovering your closing costs is an easy process. Your lender must send you a form known as a loan estimate within three business days of receiving your loan application. This form includes a list of your estimated closing costs. At least three days before closing your loan, your lender will provide you with another form, the closing disclosure. This form lists your final closing costs.

It's important to study both of these forms to make sure your closing costs are what you expected them to be.

2. What is my interest rate?

When you pay a mortgage loan, a good chunk of your monthly payment will go toward interest. In fact, during the earliest years of your mortgage, a far larger percentage of your monthly payment will go toward interest than toward paying down your principal balance.

That's why getting the lowest possible interest rate makes such a difference in both the amount of interest you'll pay during the life of your loan, and how much you'll pay each month.

Here's an example: Say you take out a 30-year, fixed-rate mortgage loan for $200,000 at an interest rate of 3.76 percent. Your monthly payment — not including property taxes and homeowners insurance — would be about $927.

If on that same loan your interest rate was 4.76 percent, your monthly payment would shoot up to $1,044, not including taxes and insurance.

3. What is my monthly payment?

Your monthly payment doesn't just include the amount you pay in interest and principal. Most lenders require that you pay extra with each payment to cover the yearly cost of your homeowners insurance and property taxes.

Your lender will then take this extra money and deposit it into an escrow account. When your taxes and insurance come due each year, your lender will use this money to pay these bills on your behalf. This can add hundreds of dollars to your monthly payment, so knowing this ahead of time is important.

Don't be fooled into thinking that your mortgage payment only includes your mortgage loan. Your property taxes and insurance make a big difference in your monthly bill.

4. What type of loan do I have?

There are several types of mortgages out there. The most common are fixed loans, usually with terms of 30 or 15 years. With these loans, your interest rate remains the same until you pay off the loan, sell your home, or refinance it.

You might also opt for an adjustable-rate loan. With an adjustable-rate mortgage, the interest rate remains fixed for a set period — usually five to seven years — and then adjusts according to whatever economic indexes your loan is tied to. Your loan's interest rate could adjust every year or it could adjust every five years. It all depends on your loan's specifics.

Consumers choose adjustable-rate loans because their initial interest rates are usually lower than those you'd get with a fixed-rate loan. But adjustable-rate loans do come with more risk: When your loan adjusts, your new rate could be higher than the rate you would have had if you had gone with a fixed-rate loan.

5. Is there a penalty for paying early?

They're not as common as they once were, but some loans come with a prepayment penalty. This means that you'll have to pay a penalty — often about 2 percent of your loan's remaining balance — for paying off your mortgage before it's due. Often, lenders who charge prepayment penalties assess them if you pay off your loan in the first two to five years.

You might not worry about such a penalty. After all, you'll never pay off your mortgage loan in two to five years, right?

But a prepayment penalty may also kick in if you decide to refinance your loan or sell your home during the penalty phase. Because of this, it's best not to sign onto a loan with a prepayment penalty.

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How to Fix Your Finances After Missing a Payment

Damian Davila — Tue, 30 May 2017 08:00:10 +0000

No matter how much you plan ahead with your finances, sometimes you'll mess up a payment. Whether you miss a due date or bounce a check, take a deep breath. It's not as bad as you think.

Let's review what you can expect to happen, how to fix the problem, and how you can make sure this doesn't happen again.

Missing a credit card payment

According to research from the Urban Institute, one in every 20 Americans is at least 30 days behind on a credit card payment or other nonmortgage type of debt. But you don't have to be that late to suffer consequences. Simply forgetting about a due date by a few days can land you in trouble.

What you can expect

Miss a credit card payment by as little as one day and you can be hit with a penalty fee. Late fees are capped by the Consumer Financial Protection Bureau at $27 for the first time you miss a due date; $38 for subsequent late payments within a six-month period. Those caps are adjusted for inflation every year.

But fees aren't the only penalty for late credit card payments. Most credit card issuers will also hike up your APR, typically to between 20 percent and 35 percent. The Credit Card Act of 2009 requires the issuer to send you a notice saying why it is increasing your rate 45 days in advance of the rate hike, and the issuer can only apply the penalty rate to purchases made 14 days after the notice was sent. However, if you don't make at least the minimum payment within 60 days of the due date, the penalty APR can be applied to your existing balance as well as any future transactions. There is a chance to reverse that, though, if you make the next six payments on time.

One silver lining exists for late payers: If your payment is less than 30 days past due, it will not be reported late to the credit bureaus.

How to fix it

If you make at least your minimum payment within 48 hours past the due date, your credit card company may credit you back any late payment fees.

Many credit card companies offer a 24-hour or after-hours customer service line to accept late payments, but you will most likely need the routing and account numbers of your bank account to make the payment immediately. If that's not an option, then make the payment through the credit card's website. A last resort is to use the mailing address for courier deliveries provided on your credit card statement, if available, and overnight a check to the card issuer.

Once you make your payment, request your credit card company waive or credit back your late payment fee and keep your standard APR (don't forget about that second item!). If approved, most credits may take up to two business days to be reflected in your balance.

How to prevent it

Your best bet is to set up automatic, recurring payments by no later than the bill's monthly due date. You can do this through your online banking platform, but payments made that way can take longer and are not as flexible as payments made through the credit card website. When you set up autopay with the card issuer, you can choose whether you want to pay the balance in full every month, make the minimum payment, or pay some other amount.

If your current due date is causing you problems, call your credit card company and request a new date that's a better match with the timing of your incoming cash flow. Just be aware that this change can take two to three business cycles to take effect. (See also: 5 Simple Ways to Never Make a Late Credit Card Payment)

Missing a utility payment

Forgetting to pay the electric, gas, or water bill can threaten your service and may even harm your credit score.

What you can expect

Utility companies don't typically report payments directly to the three credit bureaus (Equifax, Experian, and TransUnion). But there's a wrinkle: If the companies send unpaid bills to collection agencies, then those agencies will definitely report the debts to the credit bureaus. How badly a debt in collections will hurt your credit score depends on how high your credit score is when the collections agency reports it. If you have a higher credit score, you'll lose more points.

Most utility companies won't turn off your service for one late payment within 30 days, but they may do so after several missed payments. Consult your service agreement for applicable late payment fines. Before a utility company can shut down your service, it must have attempted to reach you and provided a final termination notice several days (or even weeks, in some states) in advance.

How to fix it

Don't ignore the bill. Pay it in full right away, or at least ask if your service provider will agree to a payment plan. As long as you're making agreed minimum payments, you'll continue to have access to the service and prevent the company from turning your debt over to a collector. Utility companies are usually willing to work with you to arrive at a solution. Taking initiative will prevent further headaches (and fees!) and keep the utility company from demanding a security deposit from you to continue service.

How to prevent it

Set up a recurring, automatic payment either directly with your utility company or through your financial institution. It's best to pay with a bank account rather than a credit card because many utility companies charge a convenience fee for processing credit cards, if they allow it at all.

When using your bank's bill payment service, check the processing time for payments. Some institutions mail out physical checks to your payees, so you may have to account for mailing times.

Don't have access to either option? Then consider a third-party bill payment service, such as Mint, PayTrust, or BillGO.

Last but not least, consider finding ways to limit your water and electricity use to give your budget some breathing room. (See also: 34 Smart Ways to Cut Your Electric Bill)

Bouncing a check

You wrote a check thinking you could cover it because a deposit you'd been waiting on had finally cleared your bank account, but it didn't. Now, your bank has sent you a notice that your check bounced.

What you can expect

First, let's talk about the actual payment: Your payee may or may not receive the money. Some banks won't process the payment at all. Other banks may ding your payee with an annoying fee. If the recipient of the check is a friend or family member, you may just get an earful. If it's a company or service provider, then you may have to pay them a fee.

On top of that, your bank will charge you a fee. Depending on your type of account, you can expect one of these fees to kick in:

Overdraft fee: When your checking account comes with overdraft privilege, the charge is covered and your bank charges you an overdraft fee (average $32.13 in Q4 2016).
Insufficient funds fee: When your checking account lacks overdraft protection, your check won't clear and your bank charges you an insufficient (or nonsufficient) funds fee (average $31.86 in Q4 2016).

How to fix it

As soon as you notice the problem, make a deposit into your account to cover the amount of the bounced check and the applicable fee. If you have money in another account with the same bank, the fastest way to do this is by logging on to your bank's website or app and doing a transfer. If you don't have another account with the same bank, then head to your bank to make a cash deposit (a check deposit will take longer to clear).

After making the deposit, contact your financial institution to request a one-time waiver of the overdraft or insufficient funds fee. Most banks are willing to credit back one of these charges to clients in good standing. Keep in mind, however, that they're under no obligation to do so.

How to prevent it

Know the processing time for different types of deposits coming into your bank account. For example, some mobile check deposits can take up to three business days before they clear and the funds are available in your account.
Keep track of your checks. Some checks, such as tax payment checks, are usually cashed after several days or even weeks. Forgetting about these may give you the illusion that you have a higher account balance than the one you actually have.
Set up an emergency fund in a separate account with the same bank. That way you'll be able to tap into that account to cover that bad check right away.
Sign up for mobile banking. This enables you to check and make transactions without stepping foot in a brick-and-mortar branch.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What to Do When Your Tax Preparer Makes a Mistake

Dan Rafter — Thu, 13 Apr 2017 08:00:10 +0000

You might think that hiring a tax preparer to file your income taxes will guarantee a mistake-free return. Unfortunately, you'd be wrong.

In 2015, the National Consumer Law Center used mystery shoppers to test the work of 29 tax preparers. The results were surprising: Only two of the returns compiled by these preparers came in error-free. That's bad news for a lot of people. USA Today reported in February that almost 79 million e-filed tax returns were completed last year by professional tax preparers.

And here's even more bad news: The IRS says that if your tax preparer makes a mistake resulting in you having to pay additional taxes, interest, or penalties, you are responsible for paying these fees — not your tax preparer.

If your tax preparer does make a mistake on your return, what can you do? Here are five suggestions.

1. Contact your preparer

If the IRS sends you a letter claiming that there are mistakes on your taxes, call your tax preparer for an explanation. Tax preparers who do make mistakes might offer to pay any fees, penalties, or interest charges for you. This might not restore your confidence in their abilities, but it will help save your budget.

2. Pay the penalties

If the IRS is charging you a penalty for a tax mistake, even if that mistake was made by your preparer, pay it. You might be battling it out with your tax preparer in the hope of getting this professional to pay the penalty on your behalf, but the IRS doesn't care. If it doesn't receive its payment, you are the one who will face additional financial penalties.

If your tax preparer refuses to pay for its mistake, send a check to the IRS. Then continue your fight against the preparer.

3. Know your rights

Check any contract you signed with your tax preparer. There might be language in the contract stating what your tax preparer will do in the event of a mistake. Some tax preparers will pay the interest and penalties that result from a mistake, but not any extra taxes you might owe.

Some tax preparation firms, especially the big ones, might offer insurance that you can purchase for an extra fee. If you've bought this insurance, your tax preparer might be obligated to pay any interest, fees, or extra taxes you owe because of their mistakes.

Be aware that tax preparers won't pay any penalties on your behalf, even if you've purchased extra insurance, if the mistakes they've made are because you provided them with inaccurate information.

4. Check the statute of limitations

If your tax preparer made a mistake that caused you to overpay on your taxes, you have three years to request a refund from the IRS. You must provide documentation to back up your claim that you overpaid.

This statute of limitations works in reverse, too. If you underpaid your taxes because of a preparer mistake, the IRS has three years in which they can come after you for the money you owe. If your tax preparer made a substantial error, however (such as omitting 25 percent or more of your gross income), the IRS can go back up to six years. It's recommended to keep your records for at least this long. Be aware there is no statute of limitations for those who knowingly file fraudulent returns, evade taxes, or fail to file altogether.

5. File a complaint

If you discover that your preparer made an intentional mistake, perhaps to boost your return, make an official complaint with the Office of Responsibility at the IRS. If your preparer is a member of the American Institute of Certified Public Accountants, National Association of Enrolled Agents, or a state law association, you can also file a complaint with these organizations. Such complaints could cause tax preparers to face fines or lose their licenses.

Reduce the odds of a mistake by hiring the right professional

Sometimes you can prevent a future mistake by hiring the right tax professional upfront. The truth is, anyone can work as a tax preparer. Preparers must apply for a Preparer Tax Identification Number from the IRS. But getting this number is easy: It costs $50, and the IRS says that applying takes just 15 minutes.

If you're searching for a tax professional, it's best to work with either a certified public accountant with experience completing tax returns, or what is known as an Enrolled Agent. To become an Enrolled Agent, tax preparers must first pass a three-part test given by the IRS that covers the ins and outs of individual and business tax returns. Some certified public accountants will also be Enrolled Agents.

Ask any tax preparer for the phone numbers of past clients. Then call these clients to ask about the work the tax preparer turned in. The IRS also recommends that consumers only work with tax preparers who charge a flat fee. Preparers who charge a percentage of your tax refund might be tempted to fudge the numbers to boost your return.

Finally, make sure that you provide all the proper documents and numbers. The tax preparer may or may not double check your numbers. Maybe you forgot about the antique you sold on eBay. Maybe you transposed a number when adding up your home office deductions. You can't depend on the tax preparer to notice that something is off or verify your numbers. The best professionals will ask you a lot of questions to ensure you've provided all the information. But others may just take your documents and enter the numbers.

The bottom line is if the IRS audits you and discovers that the preparer made mistakes — intentional or accidental — you'll have to pay any penalties and fees.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Saving Too Much Money for a College Fund Is a Bad Idea

Mikey Rox — Thu, 30 Mar 2017 08:30:15 +0000

If you have children, you may have a 529 education savings plan set up. While it's helpful to save for your kid's college education in advance, there are downsides to saving too much. Here are a few reasons you may want to adjust your contributions and/or revise your college fund strategy.

1. You may make more financial sacrifices than necessary

Unless you're loaded, you're probably making concessions elsewhere in your budget to keep up with contributions to your 529 — but at what cost? Are you neglecting other necessary payments, like credit card debt, resulting in additional fees? Are you compromising your health by reducing your visits to care providers? Do you have a sufficient emergency fund?

Saving for your child's college education is important, but don't put it before any immediate needs. Paid-in-full college tuition is a luxury and privilege, and it shouldn't be your top priority if other aspects of your personal life and finances are affected.

2. Your retirement fund will suffer

If you're putting your child's paid-in-full education before your own later-in-life needs, consider this: You can take out a loan for education, but you can't take a loan for retirement. Millions of students have furthered their educations on their own dime and lived to tell the tale, because they're in perfect condition to work it off after they're spit out into the real world. You, however, may be nearing the time when you may not want or physically be able to work as your kid goes off to school, and that could wreak havoc on your financial future.

"If you devote the majority of your family savings to fund college education out of pocket, be prepared to push out your retirement goals," says registered investment adviser Ryan Miyamoto. "By the time you are starting your family, you are usually thinking about getting serious with your retirement savings as well. These goals end up competing with each other, and with the rapid cost of college education, your retirement will suffer."

3. You're missing out on tax-exempt withdrawals of your 529 plan

Conservative investors miss out on the biggest benefit of 529 savings plans — tax-exempt withdrawals. Since tax-exempt withdrawals are only applicable to the gains, if you're using a 529 account to save for college and invest conservatively, your gains will be minimized compared to a growth investor. Having education as a top priority adds fuel to the fire of being conservative; you don't feel like this is your money, but rather your kids', so you irrationally think you want to minimize losses.

Adds Miyamoto, "Conversely, if these same individuals were to invest their savings into their own 401(k), the mentality changes; they're willing to take more risk since they view it as their own money."

4. You will have to pay sizable penalties if your 529 isn't used

You probably have an idea of how much you need to save for your child's education when you open your 529 plan, but whatever that number, it's still just a rough estimate. Your kid may need more than what you think college may cost at his or her time of birth, based on inflation 18 years later plus their choice of college. Let's hope the latter doesn't break the budget — but it probably will.

On the other hand, if you funnel too much money to the account and it goes unused — for instance, if your scholar attends a relatively inexpensive school (which is normally good news, but not in this case) or decides not to attend college at all — you're going to kick yourself for not being a little more selfish with your money.

"If you overload a particular savings vehicle for college, you run the risk of actually being financially penalized," explains certified financial planner Greg Knight. "For example, if you save too much in a 529 savings plan without having a drawdown strategy, you will incur income tax and a 10 percent penalty on the earnings portion of withdrawals not used for qualified education expenses. In general, distributions from 529 plans are not taxed provided they are used for qualified educational expenses. However, if you have paid all expenses and still have funds left, as the parent account owner you need to either name yourself as beneficiary and attend a qualified educational program to use the funds tax-free, or have another child or grandchild to name as a beneficiary."

With 529 distributions, a portion is tax-free (as basis) and a portion is taxable (as earnings) unless the distribution is used to pay qualified educational expenses. Without knowing in advance who will use the 529 funds until they are depleted, you run the risk of paying tax and a 10 percent penalty.

5. You don't know if your kid will go to college

Another issue with putting too much cash in one basket is the variable of whether or not your kid will go to college at all. Once they're 18, you can't really make them do anything (unless you're holding financial support over their head), and, let's face it: College isn't for everyone. Having this fund might place undue pressure for them to do something they don't really want to do.

6. Your kid might not appreciate your sacrifice

I'm not suggesting that you shouldn't save for your kid's college education, but perhaps you shouldn't foot the entire bill. At the very least, refrain from telling them how much money is actually available. Plenty of parents want to pay their kids' way through college so they can enjoy the full experience, but that's really just providing them with an excuse to avoid taking on adult financial responsibilities. They may not truly appreciate the value of their education (nor your many years of saving) if they don't have to work for at least part of it themselves.

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What Happens If You Don't Pay Your Taxes

Carrie Kirby — Fri, 03 Mar 2017 11:00:14 +0000

As Tax Day looms, you may wonder how high the tax man should rank on your list of creditors. Is it better to postpone paying taxes in order to pay off credit card debt, or to keep the electricity running?

Here's what happens if you're not able to pay everything you owe to the IRS, as soon as you owe it.

1. You'll Pay a Penalty

Assuming that you filed your tax return on time but didn't pay your full tax bill, the IRS will charge you 0.5% of what you owe, every month until you pay, up to 25% of the debt. So if you still owed $1,000 when you filed your return on April 18, you'll owe an additional $5 a month.

It's a very good idea to file your return on time, or file an extension, even if you won't be able to pay right away — fees increase if you haven't filed a return by Tax Day. Also, filing on time might get you a break: The IRS says that if you file for an extension or file your return, you may not have to pay the penalty if you've paid 90% of what you owe by Tax Day.

2. You'll Pay Interest

The IRS isn't going to lend you that money interest-free. The rate on money you owe to the IRS is currently 4%.

3. You'll Get a Bill

If you haven't filed your tax return at all, the government will kindly figure out how much you owe for you and send a bill. Actually, not so kindly, because the way they'll calculate your taxes, you'll end up owing more than you would have if you'd done them yourself. The government doesn't have access to all your financial records, so they may not give you credit for your deductions.

Even if you file your return, if you owe money, eventually you'll start getting mail about it from the IRS.

4. You Could Get a Lien on Your Home

If you don't pay those bills (or show the IRS they're wrong and you don't owe), the next step is putting a lien on your property — usually your house, if you own one. This tends to happen if you owe $10,000 or more and haven't worked out a plan with the IRS to pay it off.

A federal tax lien is a legal document that says if you sell your property, the proceeds will go toward your debt before you see a dime. This could make it tough or impossible to take out a mortgage on your home, and complicate the deal if you try to sell your home.

The tax lien will be reported on your credit report and will stay there for seven years, even after you pay the debt. This can make it impossible to get approval for new credit cards or other loans.

5. You Could Lose Your Passport

Thanks to a new law, the State Department can now revoke your passport (or refuse to issue you one) if you owe the IRS $50,000 or more in delinquent debt. So if your plan was to skip out on your debt, you won't get far.

6. The Government Could Seize Your Property

It's called a levy, and it means the IRS can take your Chevy. Or your Ford, or your RV, or boat, or house. They can even garnish your wages or take what you owe right out of your checking account. If you think owing the mob is bad, try owing the federal government.

In the IRS' defense, it doesn't start seizing citizens' property out of the blue. You'll get lots of mail warning that you're in default, telling you that you have the right to a hearing, and explaining that next, they're coming for your stuff. Don't ignore that mail.

7. You Could Pay Larger Penalties

If the IRS determines that your failure to pay in full was due to negligence or fraud, the penalties could climb to 20% or even 75%.

8. You Could End Up in Court

The IRS would rather work with you to get the money. But if you're recalcitrant or showed intent to defraud them, they can charge you with one or more felonies. In 2008, they charged actor Wesley Snipes with conspiracy to defraud the government for refusing to pay taxes on $38 million in earnings. Snipes had joined a movement of tax deniers who interpret various laws to mean that paying taxes is not required.

9. You Could Go to Prison

Most people who owe the IRS don't do time. But Snipes did. He was convicted of three misdemeanors related to his failure to file tax returns and served three years. It could have been worse: Snipes was acquitted for the felonies he had been charged with.

10. Maybe Nothing Will Happen

If the government doesn't have record of your earnings — for instance, if you work for cash and don't get dividends on investments — the IRS may never notice if you don't file a tax return and don't pay a dime. But flaking on filing is definitely a bad idea: Not only will you live in fear of all the consequences mentioned above, but if your earnings are modest, you could be missing out on the earned income tax credit and other benefits of being on record as a wage earner, like the ability to get a mortgage loan.

It's a good idea to keep in touch with the IRS if you owe them money. In fact, if you file your tax return, pay what you can, and then call them up, they may work out a payment plan with you, or even settle for less than the full amount you owe.

This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: