It’s a term thrown around a lot, and it sounds important: vesting. As in, being fully vested — that sounds pretty good and it is.
According to the IRS, being vested in a retirement plan means ownership. All employee contributions to a retirement plan are 100% fully vested — the employee owns everything he or she puts in.
However, employers usually provide a match of a certain percentage of employee contributions.
Matching contributions
Employers match contributions made by employees in different percentages. An employer might say: If you put 6% of your paycheck into the 401(k), then we’ll match your contribution by 50%. So suppose your 6% equals $3,000. Then the employer will put in $1,500. That would be an unusually generous match. Typically, an employer may match 3% of the first 6% of the employee’s salary. That equals a 9% contribution — still pretty good, especially over the long term.
They key idea, though, is that the employer sets a certain match percentage. The employer may also have rules about when their contributions are fully owned (or vested) by the employee.
Vesting rules
The employer, along with the fund managers, decides how much of the match the employee owns and when.
Newer employees may start out at lower percentages, but they become fully vested in time.
For example, an employee may become 20% vested in the company match after two years, meaning the employee owns their personal contributions plus 20% of the company match. Many 401(k) plans work out vesting in tiers. The longer you stay with the company, the more of the company contribution you own. An employee might become fully vested in, for example, six years. Then the employee owns 100% of the matching contribution.
Sometimes 401(k)s are set up so that an employee becomes 100% vested at a specific time — say after 2 years. Then they own all the matching funds on one day.
Being fully vested
The good thing about being fully vested is that you own all the money you put in and all the money your boss matches. (Plus, you own all the money that grows over time.) That means you can take the money with you if leave the company or retire.
Category: Retirement
Taxes and retirement: What is taxed?
Upon retirement, you don’t get a paycheck with the proper amount of taxes withheld. That’s obvious.
What may not be so obvious until you retire is the amount of taxes you owe. Unlike employees, retirees write checks for their taxes, making them acutely aware of their tax burden.
Of course, everything we save for retirement is taxable at some point and in some way.
If you are ready to retire, here are some things to look forward to:
- Social Security taxes: You have to pay tax on your benefit. You can have amounts from 7 percent to 22 percent withheld from every check. See form W-4V (for Voluntary).
- Pension and annuity taxes: See Form W-4P to instruct the payor how much to withhold.
- IRA distributions: The law requires 10 percent be withheld unless you tell the distributor not to withhold. You can also tell the distributor to withhold all of the taxes.
- Company plans and lump sums: Some of these plans are taxed at 20 percent.
Determining Comps When You Want to Sell Your House
The home you’ve cared for and loved might seem incomparable to you, but when you sell (or get a home equity loan), someone is going to have to find a comparison.
In the language of real estate and mortgage that is called comps.
Comps help answer the biggest question on your mind and a lender’s mind when you look to sell your house: What’s my home worth?
The answer? It depends.
It’s important to note that home values boil down to educated — and sometimes uneducated — guesses. They are merely opinions, with the one that truly matters being the bank’s. Toward the end of the process, the buyer’s bank needs to approve of the purchase price in order for the loan to be approved.
Before then, however, you have a few ways of gathering information. The best is to consult with a real estate professional who can provide you with a figure based on “comps” — comparative sales. The agent will conduct a comparative market analysis, or CMA, and give you their professional opinion on your home’s potential sales value. This is generally a far better option than relying on your neighbor’s or your uncle’s opinion, as the agent is trained and experienced at comps.
What goes into a CMA? The agent will find recent sales of similar properties in your location; the best comps are within 90 days or less, though if you live in an area that’s less populated, you’ll likely use comps from six months back and sometimes longer.
If your home is ranch style, it should be compared to sales of other ranch homes. A cape or a contemporary is different. Comps also take into consideration the number of bedrooms and bathrooms, the acreage, whether there’s a garage and a basement, and things like central air and the type of heating.
The key is to work with someone who understands your specific market and who has a track record of accurately providing figures. Top-selling agents (not necessarily top listing agents) are generally the ones who do best at this. As a seller’s agent, they know how to price your home to move while also getting you a fair price; as a buyer’s agent, they typically understand how to negotiate well.
Some 401(k) fears valid, others not, experts say Fear: The boss might steal it.
Somewhere on an assembly line is a young worker who once told a reporter: I wouldn’t put my money in a 401(k) because the boss could steal it.
Rest easy.
In average situations, there is very little chance the boss could steal the money from a 401(k), which would be a crime, probably involving fraud.
Contributions to a 401(k) go to a financial company. Maybe the boss picked the company, but the boss can’t access your money. The boss doesn’t own it and can’t spend it.
Fear: I can’t afford to contribute.
There are a lot of benefits to a 401(k). The money you put in isn’t taxed. It’s only taxed when you take it out at retirement.
If you took about $100 a week out of a paycheck every month for 15 years and put it in a 401(k), you would probably have more than $146,000 at the end of 15 years. At the end of 30 years, you’d have $611,729. This example by the Motley Fool assumes a return of 8 percent.
So, when you reach retirement, you might have your Social Security (depending on government future plans), and you’ll be able to add to it by taking 4 percent of your nest egg each month. You’ll be comfortable then if you sacrifice now.
Fear: I’ll lose all my money.
Over the long term, there is a 99 percent chance you will make money. But sometimes you won’t. Recently, retirement plans have racked up interest of 10 percent and higher. In 2008, during the housing crisis, people lost money…but not all of their money.
If you can’t stand losses, you usually can have your plan administrator put your money in highly conservative, safe investments. They don’t make as much money, but they don’t lose it either.
Fear: What if the company goes out of business?
Your money is safe because the company usually doesn’t manage retirement accounts. They have big financial companies like Fidelity, Vanguard, or Principal do that. Those companies manage millions of retirement accounts. Motley Fool says be skeptical if the plan administrator is “Scruffy’s Retirement and Fried Chicken.”
Caution lights for the 2018 tax filer
The Tax Cuts and Jobs Act of 2017 (TCJA) may not mean reduced taxes for every taxpayer, but it figures prominently for the American population as a whole.
According to TaxAct.com and other sources, the tax rates of past years are gone. Almost every tax rate and bracket for each filing status have been changed. Except for the 10% and 35% tax rates, tax changes modified most bracket rates from 1 to 4 percentage points.
The standard deduction has been increased for every filing status. Now it’s $12,000 for a single person, $24,000 for married couples filing jointly and the surviving spouse, $12,000 for married couples filing separately, and $18,000 for the head of a household.
However, the higher standard deductions mean that fewer people can itemize deductions. This change has its pros and cons, as new limits on certain itemized deductions indicate some taxpayers will lose substantial amounts they could have deducted in the past.
Depending on how many people live in the household, the increase of the standard deduction may or may not be sufficient to offset the loss of the personal exemption. Also, under the new reforms, no longer can the taxpayer claim the $4,050 personal exemption for each dependent.
Gone too are miscellaneous itemized deductions that exceed 2% of adjusted gross income (AGI). Among these deductions are unreimbursed employee expenses, safe deposit fees, investment management fees, and union dues.
Also, when previously there was no cap on state and local income taxes, now those expenses are limited to $10,000.
Meanwhile, the Child Tax Credit increases from $1,000 to $2,000, plus a new $500 credit applies for non-child dependents.
With the repeal of the Affordable Care Act’s mandate, no longer does a person choosing to forego health care coverage in 2019 pay tax penalties.
As for the mortgage interest deduction, filers who purchased a home in 2018 can deduct interest up to $750,000 in mortgage debt instead of the previous $1 million.
Also, no longer is the interest on a home-equity loan deductible.
For Americans, it’s still saving versus spending
American economic growth is high and appears to be reliable, but a warning light is flashing: Personal savings are falling.
Consumers comprise roughly 70 percent of the economy — a crucial force in economic growth.
Overall, economic growth climbed by 2.6 percent on a quarterly basis at the end of 2018. Personal consumption increased substantially in the fourth quarter of 2018 just as the savings rate slumped to 2.6 percent as a share of disposable income, its third-lowest on record.
A new study finds the median American household has $4,830 in a savings account, and almost 30 percent have less than $1,000 saved.
As of June 2018, millennials had saved less than baby boomers. Of course, older Americans have had more than three decades longer and larger salaries from which to save.
By age, these figures show millennials (born 1981-1998) saving $2,430; Gen X (1965-1980), $15,780; and baby boomers and older (born before 1964), $24,280.
MagnifyMoney, a company that provides consumers with comparison-shopping information for financial products, uses data from the Federal Reserve and the Federal Deposit Insurance Corporation.
According to the company, its results indicate that while half of all U.S. households have more than $4,830 in savings, half have less. Among households having at least some money set aside, the median savings is about $73,000.
But, Americans may still owe more in debt than they save.
According to Northwestern Mutual’s 2018 Planning & Progress Study, Americans now have an average of $38,000 in personal debt excluding home mortgages — a $1,000 increase from a year ago.
Meanwhile, the study reported fewer people said they carry no debt this year compared to 2017–23 percent versus 27 percent.
According to Emily Holbrook, Northwestern Mutual’s director of planning, the typical American’s purse strings are in “a mini tug” between enjoying the present while saving for the future.
Is debt consolidation wise?
According to ConsumerCredit.com, people thinking about consolidating debts often have one question: Is debt consolidation wise or not?
The answer is maybe. As one might expect, the wisdom of debt consolidation depends on several factors:
- The interest rate on the new loan.
- The consumer’s goal in taking out the new loan.
- The consumer’s resolve not to take on any more debt.
With a debt consolidation, you move your debt to a new loan serviced by one lender instead of many.
In theory, with a new loan at a lower interest rate, the money saved on interest each month may enable you to pay off your debts faster. Or, if the new loan has a longer term, you may be able to lower your monthly payment. Either way, debt consolidation might be useful in some situations.
But debt consolidation isn’t always effective.
Debt consolidation is useful for people who are disciplined enough to make the payments without taking on new debt. That’s the key. If you consolidate, but don’t change spending habits, you’ll be in deeper debt in a few years.
With debt consolidation, good credit can make a big difference.
Trying to consolidate debt with bad credit is usually not wise. With a bad credit rating, it is unlikely that you can get a loan with low enough interest to make a difference in paying down debt. While having only one monthly payment may be a temporary source of comfort, consolidating debt to a high-interest loan hurts finances rather than improving them.
Can balance transfers backfire?
The average American had $6,354 in credit card debt at the end of 2017 which continues the upward trend of recent years, and many people might be looking for a balance transfer after overspending during this year’s Christmas shopping season.
The benefits of a good balance transfer card are that a person with existing high-interest credit card debt can get as low as zero percent interest rate for up to 21 months. That can allow them to focus on the debt itself without worrying about interest charges slowing them down, according to The Simple Dollar.
Without proper preparation, however, balance transfers can backfire.
Balance transfers still require work and sacrifice to totally clear the debt. Bad spending habits and a lack of budgeting probably created the debt in the first place. Transferring a balance might save you interest, but it won’t save you from bad habits.
One of the worst things to do is continue to use an old credit card while trying to pay off a new one, racking up even more debt in the process.
This includes falling into the trap of wanting to use the credit card to access the rewards for things like presents for the family at the end of the year – they are not worth it if there is a balance at the end of the month.
The only way to clear out debt with a balance transfer is to divide the total balance by the number of interest-free months. That is the monthly payment you must make to ensure your profit from the balance transfer.
This payment will likely be much higher than the minimum required but paying only the minimum amount will not make much progress toward total payoff.
You’ll get the best deals on a balance transfer with a great credit score. The best scores can attract offers of zero interest for close to two years.
A strict monthly budget can help carve out extra money to pay down debt. Focus on absolutely perfect payments to increase your credit score.
Tax moves to make before year-end
As April’s tax deadline looms, there are some things you can do before Dec. 31 to cut your tax bill.
First, use any extra money to make a final contribution to an IRA or 401k. This makes a tidy deduction in taxable income. In 2018, those limits are $5,500 and $18,500, respectively.
Don’t forget that unused money in a flexible medical spending account will be lost at the end of the year so use the balance to stock up on eligible household items like bandages, vitamins, and sunscreens.
Homeowners that plan to itemize their deductions should think about squeezing in an extra mortgage payment at the end of the year, something that adds to a deduction and pays your house off sooner.
One significant change in the 2018 tax code caps the deduction for state and local taxes (SALT) at $10,000 for any combination of property, income, or sales-related taxes. For those with expensive homes in high property-tax states, this can be a hit. For example, New York’s average deduction last year was $21,000. The deduction cap won’t affect the average homeowner outside coastal and metro areas.
According to Quicken, the end of the year is also an excellent time to make energy-efficient improvements such as insulations, roofs, or doors that can qualify for up to $500 through the Residential Energy Tax Credit.
According to Quicken, the end of the year is also an excellent time to make energy-efficient improvements such as insulations, roofs, or doors that can qualify for up to a $500 credit.
Many people can gain a small advantage in their taxes by selling investments that lost money during the year and using the losses to offset capital gains on a dollar-per-dollar basis, up to $3,000, on the ones that did well. Extra losses can also be carried over to future tax years, meaning one particularly lousy year can spread out over time.
Additionally, donating cash to charity is deductible, but it is important to remember that unwanted items can be given and written off at current fair market value as well.
Dilemma: Buy big or big enough
Dilemma: Buy big or big enough
Buying a house might come down to a choice: A big-enough house or the biggest house you can afford?
The choice you make affects not just your wallet, but your lifestyle as well.
Many considerations go into the house you buy and they are just as important, if not more so, than square footage.
According to the National Association of Realtors, the median size of an existing single-family home purchased in 2017 was 1,930 square feet, down from 1,950 square feet in 2016. Square footage in new construction also decreased slightly from 2,473 in 2015 to 2,419 in 2016.
Location is a big factor. If a house is just big enough, but close to work, it could be a better choice than the big homestead. Be sure to figure in the cost of a commute in time and money before choosing the larger house over the just-big-enough house.
Consider neighborhood. Older neighborhoods might have smaller houses, but they also can have stable housing values. For example, buying new construction can be satisfying, but once newer houses are built in the tract, older houses can decrease in value. On the other hand, you still have a new house with all the security that implies.
One thing you don’t want to do is buy a house that is too small. Allow some consideration for guests or just a home office.
Think ahead to your future financial needs. Buying the largest house you can afford will lock you into high payments for not just a mortgage, although that is the most dramatic cost, but also higher utilities, taxes, insurance and repairs over the time you own the home. Some of those funds could be directed to retirement, for example.
Here is an example from the Wall Street Journal: If your smaller home saves you $20,000 each year over the life of the mortgage, you could invest that amount. That investment during the same time in a stock market portfolio making 4 percent could add up to a $1.2 million retirement fund.
It’s also possible to buy smaller but remodel over time. Pick a smaller home in a desirable neighborhood and renovate.
