reitrement

Which States Do Not Tax Retirement Income?

Jenny SmedraLeave a comment

Choosing where to retire will be one of the most important decisions you make. One factor that impacts this decision is local taxation law. How much your retirement income is taxed may have you considering a move in your golden years. After a little research, you will soon learn that local taxation varies greatly from state to state. In fact, there are some states that don’t tax retirement income at all. Here are a few financial factors you should include when choosing where to put down roots in your retirement years.

States That Don’t Tax Personal Income

If you want to maximize you savings during retirement, there are currently nine states that don’t tax retirement or personal income. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not have income taxes. However, New Hampshire and Tennessee do tax dividends and interest for the time being. But, both states have plans to phase out these taxes. Tennessee will see these changes in 2021 while New Hampshire will phase it out by 2025.

States That Don't Tax Income

 

Taxation of Retirement Income by State

The taxation laws and treatment of retirement income in the remaining states vary greatly. Therefore, you should familiarize yourself with the local laws before you make any decisions.  Some states will allow partial exemptions for pensions and social security income. However, others will tax the entire amount of your retirement income. If you are unsure how local tax laws in your state apply to Social Security benefits, you can read more here.

Pension Exemption

If you live in Illinois, Mississippi, or Pennsylvania, then there is some good news! These states exempt all your pension income from taxes. Although, this 0nly applies to qualified individuals.

Partial Exemptions and Credits

Another common structure for tax on retirement income is to allow a partial exemption or provide a credit for part of your pension income. If you settle in one of the following states, you will receive some relief since these states don’t tax your full retirement income: Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia and Wisconsin.

An alternative structuring in other states is when pension income is tax included. This applies to residents of Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, North Carolina, North Dakota, Vermont and West Virginia.

The Most Tax-Friendly States for Retirees

Tax Friendly States

In 2019, Kiplinger compiled a list comparing the tax burden for retirees state by state. To complete the analysis, they used the same hypothetical household as the constant variable.  The purpose is to compare how the burden of income, property and sales tax varied across the country.

The rankings are based on a family of four with a yearly income of $150,000 and $10,000 in dividends. Additionally, Kiplinger included $10,000 in mortgage interest on a home valued at $400,000. It then applied each state’s local income tax to these figures. Based on these metrics, here are the top 10 states that are the most tax-friendly towards retirees:

1. Wyoming
2. Nevada
3. Delaware
4. Alabama
5. South Carolina
6. Tennessee
7. Mississippi
8. Florida
9. Georgia
10. Arizona

Keep in mind that these rankings are based on a hypothetical model. Although, it may be different for your personal financial situation. If you are considering a move in your retirement years, be sure to do your homework. Lastly, don’t be afraid to seek out professional advice to help you plan for retirement. Choosing where to retire is a huge decision. Moreover, it is not one that should be made lightly. Moving to one of the states that don’t tax retirement income could help stretch your retirement savings through your golden years.

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Retirement Planning for Expats Abroad

Jenny SmedraLeave a comment

 

Retirement Planning for Expats Abroad

One option many Americans overlook is the possibility of spending their retirement years abroad. Moving to a new country is the beginning of a new adventure for some retirees. It is also an affordable alternative for those wanting to stretch their savings. However, there are some serious questions you must ask yourself about retirement planning for expats abroad. Which country best suits your needs? How do you ensure access to your retirement funds and draw your social security benefits? What financial policies and tax laws apply to U.S. citizens abroad?

If you already have a destination in mind, relocation guides such as this one can give you all the information you will need. If not, here is some basic information for any expat planning to retire abroad.

Social Security Benefits

Social security benefits provide financial support to the retired, disabled, and dependents or beneficiaries of a deceased worker. They should not be the sole source of income when retirement planning for expats. Instead, your monthly benefits replace a portion of your wages based on your pre-retirement income.

The amount you receive is determined from your indexed monthly earnings over the 35 years. If you worked more than 35 years, they will use the years when you earned the highest income. This can become more problematic for expats, such as myself. Since I have lived and worked outside the U.S. since my early 20s, it is going to be more difficult to accrue 35 qualifying years. In order to receive any benefits, you must have ten years of employment (40 credits) to be eligible.

The federal government uses different formulas and factors to calculate your social security benefits. This means monthly amounts will vary from person to person. The good news is that you are able to claim your Social Security benefits from anywhere in the world. As long as you have access to your domestic accounts that receive your checks, you should have no trouble getting your money. Many international banks also accept direct deposits into foreign accounts as well.

IRA Contributions

Traditional and Roth IRAs are key components of any investment portfolio. Unfortunately, there are tight restrictions on any contributions you make if you claim the Foreign Earned Income Exclusion. The FEIE is an exclusion credit that reduces your taxable income. Any amount over the yearly adjusted threshold is subject to double taxation.

For my particular case, all my foreign income is excluded. I fall below the qualifying amount of $107,600 for 2020. Therefore, none of my foreign income is eligible for IRA contributions. However, the IRS taxes any foreign income above this threshold so it is eligible. Unfortunately, all my contributions must be generated domestically and filed accordingly.

Due to financial policies for foreign banking institutions, there are severe penalties for any violations. Not only must I be careful how I fund my IRA, but I cannot legally make any portfolio changes while I am outside the U.S. This carries heavy fines and legal repercussions no one would want to face.

Online Banking

Probably the most important tool at your disposal is online banking. Before moving abroad, make sure you put all your accounts online and notify your bank. It is also a good idea to switch to digital correspondence. This is especially important if you have monthly bills to pay or Social Security checks to collect.

Moving abroad and retirement planning for expats can seem overwhelming at first. If you are uncertain whether it is the right decision, read through this checklist to see what it would require. You may be closer than you think.

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How Are Social Security Benefits Calculated?

Jenny SmedraLeave a comment

How Are Social Security Benefits Calculated

Social Security benefits are a crucial element of retirement planning. For those without investments or pension plans, it may be their sole source of income. The government website has made it easy to access your personal retirement benefits online. Once you create an account, you are able to see how much you qualify for. You can also adjust the calculations in different age scenarios. However, you may still be asking yourself, “How are Social Security benefits calculated?” Several factors discussed below affect the formula for your personal benefits.

The Social Security Formula to Calculate Benefits                                                 

Your lifetime earnings determine your personal Social Security benefits. First, the formula indexes your actual earnings. This is to account for any fluctuations in average wages from your first year of receiving wages. Then, they find your average monthly earnings for the 35 years with the highest earnings. Your average indexed monthly earnings, or AIME, only counts income within the maximum table earnings. For 2020, this amount is $137,700.

The Social Security benefits formula applies to this figure. The new total gives you a “primary insurance amount” or PIA. Your PIA is the basic benefit you will receive once you reach full retirement age. The sliding scale helps low earners who depend more upon these benefits. The current year’s breakdown separates wages into three categories:

  • 90% of intial $960 of AIME
  • 32% of any amount between $960 – $5,785
  • 15% for any amount above $5,785

Lastly, you enter your age when you begin claiming benefits. If this seems complicated, you can also use their Retirement Calculator to estimate your individual benefits.

Factors that Affect Social Security Benefits

If you want to check the math yourself, there are a few factors that could change the final total. First and foremost, you will receive less if you claim Social Security benefits before full retirement age.  You can claim them beginning at the age of 62. Although, you will lose a significant amount of money if you do.

Secondly, your benefits get recalculated every year. This is to adjust payments based on inflation. It also includes any income from the previous year. You can qualify for an annual cost of living increase until you reach 70. Should you delay your retirement, you will also receive incremental monthly increases.

Finally, certain people will use a different formula. This is usually the case for government workers, or people who receive retirement/disability pensions from a job that didn’t pay Social Security taxes. The website provides a second calculator if the Windfall Elimination Provision (WEP) will affect your Social Security benefits.

Future Funding for Social Security

The future of Social Security has become a hot topic of debate. In particular, many people are questioning the sustainability of retirement benefits. Will the current generation of workers receive the same benefits? Should we count on receiving Social Security benefits after retirement? The answer is unclear. We must remember the future is unpredictable and these ideas are not well understood.

The Social Security Board of Trustees predicts that program costs will rise by 2035. At this point, taxes will only cover 75% of scheduled benefits. The reduced benefits are a result of an aging population and a lower birth rate. Experts believe there will be greater public debt since more people will be claiming their trust fund assets and redeeming Treasury debt securities. Although it appears there will be funding available, it is always best to diversify your retirement plan. Most importantly, be certain how your Social Security benefits are calculated.

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Two Modern Ways to Establish a Retirement Fund

Susan PaigeLeave a comment

 

Most people these days are working hard not just because of their families, but to save up for something. For example, if you want a car or some other luxury item, they tend to work crazy house just to get it. Some people are so lucky that they can do that while hardly working. For the common American though, they need to do a whole lot more. According to this page, this is one of the reasons why most people these days have multiple jobs just to support themselves. Life might be tough, but we are here to survive all of that. Continue reading →

Using Real Estate to Fund Your Retirement

Calvin Ebun-Amu1 Comment

With the right assets, one can ensure they have sufficient cash flow to not only fund their retirement but also to fund the lifestyles of their children and grandchildren. While 65 is a common age to retire, real estate could lower the age for many to retire. Continue reading →

2019 Roth IRA Contribution Limits

Budget and InvestLeave a comment

Fall is quickly approaching.  Every October the IRS (Internal Revenue Service) releases their updated retirement limits for a number of accounts.  The Roth IRA is one particular account that many will be looking at.

For 2018, the contribution limit for a Roth IRA is $5,500 with an additional $1,000 catch-up for individuals over the age of 50.  The 2019 Roth IRA contribution limits will be announced by the IRS in less than two months.

Image result for 2019 roth ira contribution limits

The government uses inflation numbers to determine when and by how much to raise retirement limits.  When it comes to IRA’s, any annual increase in contribution limits will be in $500 increments.  Meaning that there are only two possibilities when it comes to the 2019 Roth IRA contribution limits.

Either the limits remain the same at $5,500 ($6,500 for individuals 50 or older) or it is increased to $6,000 ($7,000 for individuals 50 or older).  It is expected that the 2019 Roth IRA contribution limits will increase to the latter amount.

So what does an increase in $500 a year for a Roth IRA account mean?  Well, for starters, instead of being able to contribute an awkward $458.33 per month to the account, you will now be able to contribute an even $500.  Of course this only applies to individuals under the age of 50.  Contributing on a consistent basis has proven time and again the best way to invest.  You can take advantage of the market when it hits various highs and lows.

Are you worried that you won’t have the additional funds to contribute an extra $500 a year to a Roth IRA?  Then now is as good of a time as ever to go and create your very own free budget.  The best way to see where you are spending your money every month is to track it.  Although it might seem like a challenge at first, you will most likely be able to find a way to contribute the additional $41.67 per month to your Roth IRA.

Why choose a Roth IRA?  There are many benefits to having one.  First and foremost, the money you put into it will grow and compound tax free through the years.  Additionally, when you do decide to withdraw from the account, you will not be required to pay any income taxes on the withdrawals.  It’s an especially good account to have in order to help offset tax burdens brought on by 401k’s and social security.

With the official numbers for the 2019 Roth IRA contribution limits less than two months away, we will have to wait a little longer, but we can predict that more than likely the amounts will increase.

Budget Smart, Invest Wise

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

2018 401(k) Contribution Limit Unveiled

Budget and InvestLeave a comment

Death and taxes.  The two things that most say are certain in life.  Well now at least when it comes to taxes you might be able to avoid some because of a recent decision by the Internal Revenue Service (IRS).  The IRS recently came out with the guidelines for 2018 when it comes to tax-advantaged retirement accounts.  Although none of the changes were dramatic, they made a few tweaks that will allow individuals to boost retirement savings in certain tax friendly accounts.

Image result for 2018 401k contribution limit

 

 

 

 

 

 

The 2018 401(k) contribution limit is being pushed slightly upward to $18,500 per year.  This is a $500 increase on what it used to be.  Individuals who are 50 and over can still save an additional $6,000 meaning some can contribute as much as $24,500 into a company 401(k) plan.  While an increase in the 2018 401(k) contribution limit came about for the upcoming year, other retirement plans such as IRA’s and Roth IRA’s remain unchanged.  You are still only able to contribute $5,500 per year to both traditional or Roth IRA.

IS CONTRIBUTING TO A 401(k) A GOOD IDEA?

The short answer is absolutely!  While not all companies offer 401(k) plans for employees, a lot do.  It is highly recommend that you put in at least the minimum amount required to get the full match your company offers.  Once you have done this, see if you can contribute a little bit more and further increase your retirement savings.  At my first job, I began contributing 6% which was what I needed to do to get the entirety of my company’s match; however, I began to increase it over time.  Get a 3% raise?  Try increasing your 401(k) contribution by 2%.  This was a simple and easy method I did each time I’d receive one, and the best part was I never missed the money at all.

IS IT EVEN POSSIBLE TO CONTRIBUTE $18,500 OR $24,500 TO A 401(k)?

Yes again.  Is it hard?  Sure it can be, but is it doable?  Absolutely.  How do I know it’s possible?  Because I myself max out my retirement account for my 401(k).  I never see the money.  It’s taken directly out of my paycheck, so I never miss out on spending it.  The recent increase of the 2018 401(k) contribution limit is something that I will take advantage of.  A small percentage bump can make a lasting impact during one’s retirement.

In closing, the increase of the 2018 401(k) contribution limit won’t have much of an impact on most people.  Very few actually max out their retirement accounts.  But if you’re like myself, then you welcome the news with open arms.  While 2018 saw an increase to the 401(k) contribution limit, 2019 has a very good chance to see an increase for contribution limits to both traditional and Roth IRA’s.  Only time will tell.

Budget Smart, Invest Wise

FIRECalc Review

Budget and InvestLeave a comment

20 years ago, if you were interested in planning your retirement you had to sit down with a financial professional. Back in the 90’s and early 2000’s, meeting with someone with such financial experience was commonplace and expected. Fast forward to today and now people planning for retirement have a plethora of options to choose from. You can sit at your desk and pick stocks, you can set up an online investment profile, you can open a retirement account in as little as five minutes! With the ease of picking a retirement plan simplified, you can also simplify the math through several apps and online calculators. This FIRECalc review will show you that you, the investor, now have access to almost all of the tools that were once reserved for professional money managers.

What is FIRECalc?

FIRECalc is a new type of retirement calculator that factors in historical volatility into one’s retirement projection. Many used to think of retirement projections as the following: I have a $1,000,000 portfolio which I draw 4% from on an annualized basis, therefore I have $40,000 I am withdrawing. Unfortunately, retirement projections like this don’t always pan out. Think of the most recent financial disaster where many portfolios were slashed in half. What FIRECalc does is allow you to see all of the possible outcomes of your portfolio, whether it’s a market rally or another collapse.

The Benefits of FIRECalc:

FIRECalc can let you see a projected path of possibilities for retirement. The picture below uses the following example: Bob has a portfolio balance of $1,000,000. He needs to withdraw $50,000 a year for 30 years in retirement. The lines below indicate the vast array of possibilities that his money will last through all 30 years. With the red line signifying “Zero” you can see that the majority of lines end above. This means that based on historical factors, Bob more than likely will have enough funds to cover his spending requirement in his retired years.

What Else Can FIRECalc Do?

The premise that FIRECalc was built on was in dealing with historical market averages. FIRECalc uses this basis and expands it to many other calculator offerings. Around a third of all Americans rely on social security as their main source of income in retirement. Will your social security payments be enough for your retirement? FIRECalc will let you know what your chances of success are. Other calculators they have include ones for people who are looking to set up a future retirement, various spending models, along with a portfolio allocation model.

Conclusion:

I hope this FIRECalc review shows you the many benefits the site can offer. While it is not entirely user friendly (it looks very simple and plain), it does provide you with something all other retirement calculators lack. Most retirement calculators assume a specific return every year during the duration of your investment horizon. FIRECalc is different in that it presents you all of the possibilities. Markets can go up by 20% in a year, and they can also go down over 30%. There are many fluctuations to take into account and that is exactly what FIRECalc does.

One Easy Way to Slash Taxes

JW SteinertLeave a comment

Slash Taxes

Reduce your taxes and increase your savings.  Sounds almost a little too good to be true right?

It’s possible, it’s easy, and I just did it and so can you.

Today is the final day for you to file your taxes for this year.  Did you pay more in taxes than you would have liked?  Do you want to lower your tax bill for next year?  If so, then here is how to do it:

Increase your 401k contribution to your company’s plan.  What percentage of your salary are you contributing to your 401k currently?  Bump it up.  By increasing your pre-tax 401k contribution to your plan you are in effect reducing the amount of income you take home, thus reducing your tax burden.

I recently increased my pre-tax contribution percentage by 8% and found that I will save roughly $1700 this year on my taxes.  It’s that simple.  Increase your savings, reduce your tax burden.  This offers 3 key benefits.

Benefit 1:

You lower the amount of taxes you will be paying for the year.

Benefit 2:

You increase the amount of savings you will have at retirement.  The more you save now, the more you will have later.

Benefit 3:

Because you don’t see the additional money you put into your 401k plan on your paycheck, you won’t spend it, and most likely you won’t miss it.

 

Budget Smart, Invest Wise

 

The Retirement Crisis and How to Avoid It

JW Steinert1 Comment

retirement crisis

There is a retirement crisis currently underway.  Why is this?  Because people don’t save during their working years to fund their golden years.  The Economic Policy Institute recently released is a startling report about American’s retirement savings.

The Retirement Revolution That Failed: Why the 401(k) Isn’t Working

The graph above shows the median account values of retirement savings for a given age group.  The overall median among all age groups is a meager $5,000 while the median value for those closest to retirement, 56-61 age group, have only $17,000 saved up.

To put this in perspective, I am 26 years old and have been employed full time for less than 4 years.  In my retirement accounts, which include a company 401k, a rollover IRA and a Roth IRA, I have $47,589 saved.

Retirees are relying on Social Security by larger percentages these days.  Nearly 2 out of every 3 retirees rely on Social Security for at least 90% of their retirement income.  No matter your current age, there are ways to ensure that you are setting yourself up for success in your later years.  Here are the steps I followed to have my current retirement savings:

  1. Fund a Company 401k and get a full employer match.  This should be a no brainer.  Fund your company’s 401k plan at least to the amount that will maximize your employer’s match.  It’s FREE MONEY.
  2. Start an IRA.  I prefer a Roth IRA because it is money you will never be taxed on again, and is a good complement to a 401k (which you will pay income tax on in the future).  Go to Vanguard’s website and get one started in a matter of minutes.
  3. Maximize out your 401k.  If you are under 50, you can contribute up to $18,000 of your pre-tax pay to a 401k.  If you are over 50, you can contribute an additional $6,000.  See if you can contribute an additional 1 or 2 percent each year until you reach the maximum.

Planning for retirement is now more important than ever.  Many don’t have pensions to rely on anymore, so the responsibility is now on YOU to determine your retirement destiny.

Budget Smart, Invest Wise