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Published: Thursday, November 09, 2017 @ 3:05 PM
When the Tax Cuts and Jobs Act was unveiled by House Republicans last week, a lot of attention was dedicated to what wouldn’t happen with your 401(k).
Namely, the tax bill didn’t drastically lower 401(k) retirement account contribution limits as some feared it would.
But other changes could be coming to your 401(k) plan under the proposed tax bill that you should be aware of.
Currently, you have 60 days to pay back a 401(k) loan with no penalty if you leave your company or the retirement plan at your employer terminates for some reason.
If you don’t get it paid off during that 60-day window, the money gets treated as a taxable distribution. Plus, you could also get hit with an additional 10% penalty if you’re under 59½.
The new tax bill, however, proposes stretching that 60-day repayment term out much longer — until when you file your tax return for the year in which you take the loan.
That would be a big change if this provision of the tax bill get passed as written!
Let’s illustrate this proposal with a real-world scenario: Say you take a 401(k) loan on January 1, 2018 and then leave you company the next month. If the tax bill gets passed as written, you would have until April 15, 2019 to pay that money back without penalty.
(Editor’s note: Money expert Clark Howard generally isn’t in favor of 401(k) loan. Before you consider taking a 401(k) loan in your life, read this piece about the hidden costs.)
There are two big proposed changes here related to hardship distributions.
First up, the tax bill as written would let participants keep saving in their retirement plan as regularly scheduled even after taking a hardship distribution.
This would be a change from current rules that say employees have to stop making contributions for six months following a hardship distribution.
Another change the Tax Cuts and Jobs Act proposes is allowing plan sponsors (your employer) to let you tap into both account earnings and employer contributions to gather up money for a hardship distribution.
That’s a marked change from current rules that state hardship distributions can only come from your contributions — not the employer match or any gains on your investments.
As a reminder, we should note that employers are not required to offer you hardship distributions from their plan. But some choose to. The IRS has general guidelines on what circumstances warrant a hardship distribution.
If you have a pension plan at work, you currently have to wait until you’re 62 to take what’s called an in-service distribution.
Investopedia defines an in-service distribution or withdrawal in the following way:
“A withdrawal made from a qualified plan account before the holder experiences a triggering event. A triggering event, such as reaching a certain age, or leaving an employer, is often needed to be able to withdraw funds from a plan, such as a 401(k).”
Under the tax bill proposal, that age limit would be lowered to 59½.
This one’s a little complicated, but stick with us…
Sometimes financial advisors will have a client take pre-tax money, pay the tax on it and convert it to an after-tax account like a Roth IRA. That’s called doing a Roth IRA conversion.
But under certain market circumstances, it might be advantageous to undo the conversion and make the money pre-tax again. That’s considered a recharacterization; it’s basically just converting Roth money back to pre-tax money.
OK, good. The next thing you need to know is that the Tax Cuts and Jobs Act aims to disallow the recharacterization that would undo the conversion.
Think of it like this: The tax bill says it’s OK to have a one-way ticket to Roth World (aka doing a Roth IRA conversion), but you shouldn’t get a round-trip pass that lets you go to Roth World and then travel back again to 401(k)sville — in other words, do a recharacterization.
Fortunately, this is a provision that would impact financial planners the most, not the average 401(k) saver.
If you’re following developments closely, you know the House bill is moving through committee right now.
Next up, the Senate will have to propose its own version of tax legislation.
Then by the end of the process, both the House and the Senate will have to try to reconcile their differences in proposed legislation before the tax bill can become law.
Published: Wednesday, December 13, 2017 @ 10:32 AM
— It's that time of year again when parents and college or college-bound students fill out the FAFSA (Free Application for Federal Student Aid).
The idea of wading through a form – especially one that requires financial information – is definitely not an appealing idea, but the FAFSA could be a tremendous help in getting your student money to attend college.
The following points are what you need to know, as well as common mistakes to avoid when filling out the FAFSA.
Fill it out – you have nothing to lose.
You may think that you don't need to fill out the FAFSA, especially if you believe you might not qualify for need-based aid. But there's no income cut-off point with federal student aid, according to the U.S. Department of Education. In addition, the FAFSA can help you qualify for all kinds of grants, loans and scholarships, including those offered by your state, school or private organizations.
By investing a few minutes of time, you could reap thousands of dollars in potential rewards.
Submit it ASAP.
The sooner you submit your FAFSA, the better, according to consumer adviser Clark Howard. Although the federal deadline isn't until June 30, 2018, you should check with the financial aid administrator at colleges you're interested in to make sure their deadlines aren't earlier.
Submitting earlier will help you plan how you'll pay for college. You'll also have a better chance of getting as much aid or scholarship money as possible since some colleges distribute their available money on a first-come, first-serve basis, Howard says.
Gather the information you'll need.
The FAFSA asks questions about the student as well as his or her parents if the student is a dependent.
You'll need the following information on hand as you fill out the FAFSA:
Watch out for common mistakes.
The National Association of Student Financial Aid Administrators points out some common mistakes that can delay your form's submission or cause you to not get the aid and scholarships you might qualify for. They include the following:
Keep an eye out for requests for more information.
Your FAFSA may be selected for verification, which means you'll have to provide some additional or supporting information, U.S. News & World Report explains. This process doesn't necessarily mean you've done anything wrong. You may have a discrepancy or mistake on your form, but some FAFSAs are just randomly selected for verification (lucky you!).
Published: Wednesday, November 22, 2017 @ 12:01 PM
— With the recent massive security breach of Equifax — one of the three credit bureaus with which many may have thought their private information was safer than most — now many people are dealing with more insecurities, wondering where they can entrust their private information, if anywhere.
Here are some options:
Better and cheaper than credit monitoring, an option for optimal security is freezing your credit through each of the three credit bureaus (Experian, Equifax and TransUnion), according to WSB money expert Clark Howard at Clark.com.
The fee is $3 to $10 per person per bureau, depending on your state, to allow you to seal your credit reports — except now it's free with Equifax from here on out due to the recent data breach.
You will be provided with a personal identification number (PIN) that only you know and can be used to temporarily unfreeze (or "thaw") your credit when legitimate applications for credit and services need to be processed such as when you are buying a car.
This added layer of security means thieves can't establish new credit in your name even if they are able to obtain your personal information.
LifeLock vs. CreditKarma.com
While LifeLock advertises it can help consumers secure their information to guard against identity theft, LifeLock charges monthly services that start at $10 a month.
This kind of credit monitoring is not the same or as effective as a credit freeze, said Craig Johnson for Clark.com.
Instead, he recommends CreditKarma.com for free credit monitoring.
If you haven't already frozen your credit, now would be the time since Equifax recently got hacked and the information of possibly 145.5 million people was attained by these hackers.
Information accessed primarily includes names, social security numbers, birth dates, addresses and, in some instances, driver's license numbers.
To try to compensate, Equifax is offering free identity theft protection and credit file monitoring (but only through Jan. 31, 2018) with its TrustedID Premier.
Another point of confusion is the unsolicited free Dark Web Email Scan offered by Experian to your email, leading to a monthly fee for further scanning.
Experian IdentityWorks also offers a free 30-day trial membership for identity theft protection and resolution, involving a monthly automatic deduction of $9.99 for the plus plan or $19.99 for the premium plan.
It's free to cancel within the 30-day trial period, but the consequences are not revealed up front for those who decide to cancel their membership once the monthly fees begin.
Published: Friday, November 17, 2017 @ 4:17 PM
— Your house is a large expense with many associated costs like a mortgage payment, insurance, maintenance and more.
It provides a roof over your head, of course, but since it usually costs you money each month, why not put it to work for you and earn some cash in the process?
The following are four ways your house can make you money:
List your home with Airbnb or VRBO.
If you're planning to be out of town for a few days or don't mind bunking with a friend, you may be able to make some money by renting out your home through sites like Airbnb and VRBO.
Before jumping in, you'll need to take time to learn about the market, your expenses and any taxes you may need to pay. And before you list your property, you'll need to understand how to make it stand out with a good listing, including compelling photos and competitive pricing. Airbnb has a series of toolkits to help with this.
Rent it out to the area's growing TV and film industry.
When TV, film and commercial producers want to depict a home on screen, many times they'll rent the real thing, according to Money. It can be inconvenient for owners, however, since their homes may be taken over by a large crew and be completely rearranged.
On the other hand, homeowners often have fun with the experience while making some extra money. And while you're watching TV or a movie, you may be able to spot your home.
Host a foreign exchange student or faculty member.
Temporarily hosting a foreign exchange student or faculty member who's studying or teaching in this country can help you make some extra cash for anywhere from six weeks to six months at a time. You'll also be exposed to a different culture and language, and the experience could help you form a bond that lasts even when your guest returns home.
The Penny Hoarder suggests contacting student housing offices at local community colleges and universities, asking to be placed on their list of host families. After this, you'll have to apply, be interviewed, and allow your home to be toured. You'll also need to pass background and reference checks.
Rent out your driveway or storage space.
If you have extra space in your driveway, you may be able to make some money by letting others park there, according to Men's Health. This is especially true if you live near a commuter rail line or sports stadium, but you'll need to check to make sure you're not violating any local ordinances. Check out websites like JustPark to get started.
Published: Tuesday, November 14, 2017 @ 3:15 PM
— Health insurance has a large impact on your finances, so it pays to get the most out of your plan.
Understanding its ins and outs can be confusing, but it's worth your time to check on benefits you could be losing out on or mistakes that could cost you money.
Choose your plan carefully.
When it's time to renew your health care coverage, consumer adviser Clark Howard recommends not just blindly signing up for your current plan, even if you've been happy with it.
Your plan – as well as other options you may be able to sign up for – may have changed. Take a close look at the co-pays, deductibles, in-network providers and other specifics to make sure you're making the best possible choice.
Take advantage of preventative care benefits.
Almost every plan, according to healthcare.gov, offers preventative care benefits that are free. You won't have to pay a co-pay or meet your deductible to get these services at no charge.
Services for adults include age-appropriate vaccinations and colorectal cancer screenings for patients over 50.
Work within your formulary.
Health care plans typically have a formulary, which is a list of medications that they're willing to pay part of or the entire cost of. It may include a list of preferred medications, for which it will pay the highest percentage of the cost.
It pays to be familiar with your formulary before you get an unpleasant surprise at the pharmacy, according to NerdWallet. Print out a copy of the document from your health insurance company's website, or call up an online copy at your doctor's office. Your doctor can work with you to make sure you get an effective medication that you can afford.
Utilize HSAs and FSAs.
If your health insurance plans allow you to put aside tax-free dollars in a Health Savings Account (HSA) or Flexible Spending Account (FSA), you should learn how they can help you. Consumer advisor Clark Howard's website, Clark.com, has a chart that explains the pros and cons of each.
An HSA is usually associated with high-deductible plans, and like an FSA, it helps you save money to pay for health care expenses. These can include everything from prescription eyeglasses to medication.
Watch out for surprise out-of-network charges.
Your insurance plan has a list of network providers, and when you can, you should stay in-network. That's easy enough if you're visiting a single doctor, but if you need to have surgery, things can get more complicated.
For pre-planned surgery, Consumer Reports recommends talking with your doctor's billing department to get a list of everyone who will provide your care, including radiologists and anesthesiologists. Call your health care company to see if they're in-network, and if not, ask your doctor if in-network providers can be used.