A 401(k) retirement plan is one of the most powerful savings vehicles on the planet. If you’re fortunate enough to work for a company that offers one (or its sister for non-profits, a 403(b)), it’s a valuable benefit that you should take advantage of.
But many people ignore their retirement plan at work because they don’t understand the rules, which may seem confusing at first. Or they worry about what happens to their account after they leave the company or mistakenly believe you must be an investing expert to use a retirement plan.
Let's talk about seven primary pros and cons of using a 401(k). You’ll learn some lesser-known benefits and get tips to save quickly so you have plenty of money when you’re ready to kick back and enjoy retirement.
What is a 401(k) retirement plan?
Traditional retirement accounts give you an immediate benefit by making contributions on a pre-tax basis.
A 401(k) is a type of retirement plan that can be offered by an employer. And if you’re self-employed with no employees, you can have a similar account called a solo 401(k). These accounts allow you to contribute a portion of your paycheck or self-employment income and choose various savings and investment options such as CDs, stock funds, bond funds, and money market funds, to accelerate your account growth.
Traditional retirement accounts give you an immediate benefit by making contributions on a pre-tax basis, which reduces your annual taxable income and your tax liability. You defer paying income tax on contributions and account earnings until you take withdrawals in the future.
Roth retirement accounts require you to pay tax upfront on your contributions. However, your future withdrawals of contributions and investment earnings are entirely tax-free. A Roth 401(k) or 403(b) is similar to a Roth IRA; however, unlike a Roth IRA there isn’t an income limit to qualify. That means even high earners can participate in a Roth at work and reap the benefits.
RELATED: How the COVID-19 CARES Act Affects Your Retirement
Pros of investing in a 401(k) retirement plan at work
When I was in my 20s and started my first job that offered a 401(k), I didn’t enroll in it. I was nervous about having investments with an employer because I didn’t understand what would happen if I left the company, or it went out of business.
I want to put your mind at ease about using a 401(k) because there are many more advantages than disadvantages.
I want to put your mind at ease about using a 401(k) because there are many more advantages than disadvantages. Here are four primary pros for using a retirement plan at work.
1. Having federal legal protection
Qualified workplace retirement plans are protected by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law. It sets minimum standards for employers that offer retirement plans, and the administrators who manage them.
ERISA offers workplace retirement plans a powerful but lesser-known benefit—protection from creditors.
ERISA was enacted to protect your and your beneficiaries’ interests in workplace retirement plans. Here are some of the protections they give you:
Disclosure of important facts about your plan features and funding
A claims and appeals process to get your benefits from a plan
Right to sue for benefits and breaches of fiduciary duty if the plan is mismanaged
Payment of certain benefits if you lose your job or a plan gets terminated
Additionally, ERISA offers workplace retirement plans a powerful but lesser-known benefit—protection from creditors. Let’s say you have money in a qualified account but lose your job and can’t pay your car loan. If the car lender gets a judgment against you, they can attempt to get repayment from you in various ways, but not by tapping your 401(k) or 403(b). There are exceptions when an ERISA plan is at risk, such as when you owe federal tax debts, criminal penalties, or an ex-spouse under a Qualified Domestic Relations Order.
When you leave an employer, you have the option to take your vested retirement funds with you. You can do a tax-free rollover to a new employer's retirement plan or into your own IRA. However, be aware that depending on your home state, assets in an IRA may not have the same legal protections as a workplace plan.
RELATED: 5 Options for Your Retirement Account When Leaving a Job
2. Getting matching funds
Many employers that offer a retirement plan also pay matching contributions. Those are additional funds that boost your account value.
Always set your 401(k) contributions to maximize an employer’s match so you never leave easy money on the table.
For example, your company might match 100% of what you contribute to your retirement plan up to 3% of your income. If you earn $50,000 per year and contribute 3% or $1,500, your employer would also contribute $1,500 on your behalf. You’d have $3,000 in total contributions and receive a 100% return on your $1,500 investment, which is fantastic!
Always set your 401(k) contributions to maximize an employer’s match, so you never leave easy money on the table.
3. Having a high annual contribution limit
Once you contribute enough to take advantage of any 401(k) matching, consider setting your sights higher by raising your savings rate every year. For 2021, the allowable limit remains $19,500, or $26,000 if you’re over age 50. A good rule of thumb is to save at least 10% to 15% of your gross income for retirement.
Most retirement plans have an automatic escalation feature that kicks up your contribution percentage at the beginning of each year. You might set it to increase your contributions by 1% per year until you reach 15%. That’s a simple way to set yourself up for a happy and secure retirement.
4. Getting free investing advice
After you enroll in a workplace retirement plan, you must choose from a menu of savings and investment options. Most plan providers are major brokerages (such as Fidelity or Vanguard) and have helpful resources, such as online assessments and free advisors. Take advantage of the opportunity to get customized advice for choosing the best investments for your financial situation, age, and risk tolerance.
In general, the more time you have until retirement, or the higher your risk tolerance, the more stock funds you should own. Likewise, having less time or a low tolerance for risk means you should own more conservative and stable investments, such as bonds or money market funds.
RELATED: A Beginner's Guide to Investing in Stocks
Cons of investing in a 401(k) retirement plan at work
While there are terrific advantages of investing in a retirement plan at work, here are three cons to consider.
1. You may have limited investment options
Compared to other types of retirement accounts, such as an IRA, or a taxable brokerage account, your 401(k) or 403 (b) may have fewer investment options. You won’t find any exotic choices, just basic asset classes, including stock, bond, and cash funds.
However, having a limited investment menu streamlines your investment choices and minimizes complexity.
2. You may have higher account fees
Due to the administrative responsibilities required by employer-sponsored retirement plans, they may charge high fees. And as a plan participant, you have little control over the fees you must pay.
One way to keep your workplace retirement account fees as low as possible is selecting low-cost index funds or exchange-traded funds (ETFs) when possible.
One way to keep your workplace retirement account fees as low as possible is selecting low-cost index funds or exchange-traded funds (ETFs) when possible.
3. You must pay fees on early withdrawals
One of the inherent disadvantages of putting money in a retirement account is that you’re typically penalized 10% for early withdrawals before the official retirement age of 59½. Plus, you typically can’t tap a 401(k) or 403(b) unless you have a qualifying hardship. That discourages participants from tapping accounts, so they keep growing.
The takeaway is that you should only contribute funds to a retirement account that you won’t need for everyday living expenses. If you avoid expensive early withdrawals, the advantages of using a workplace retirement account far outweigh the downsides.
The Capital One 360 Performance Savings account, commonly called Capital One 360 Savings, is a high-yield savings account with no monthly fees and no minimum balance required. Capital One makes it easy to get started, allowing you to open a new account online in about five minutes. And with the well-reviewed Capital One mobile app, you can easily manage your account on the go.
In this post, weâll cover the details of having a Capital One 360 Savings account, including the pros and cons â and how it compares to similar accounts. Plus, weâll help you decide if this is the right account for you.
Capital One 360 Savings Account Fast Facts
Annual fee: none
Minimum balance: none
Current APY: 1.50% (as of 30 April 2020)
Comparatively high yields
No monthly fee
Easy to get started
Mobile app access
No ATM cards
Comparatively few local branches
Capital One Savings Account Benefits
There are lots of benefits to having a Capital One savings account. Here are some of the highlights:
A 1.50% APY is a respectable interest rate for a savings account. This interest rate is even more enticing when you generally carry a fairly low balance. Unlike many accounts that offer tiered rates depending on how much money you keep in your account, Capital One offers the same 1.750% APY on all balances. So even if you only have $90 in your account, youâll still earn that 1.50% APY rate.
No Minimum Balance Requirements or Monthly Fees
With the Capital One 360 Savings account, you donât have to worry about carrying a minimum balance. And you wonât be charged a monthly maintenance fee to keep your account open. This no-minimum, no-fee structure has become fairly standard in the competitive world of online banking, but it is still an improvement over traditional bank accounts, many of which still charge monthly fees and/or require you to maintain a minimum balance.
Easy to Get Started
Capital One makes it easy to start saving. You can open your new account online in about five minutes. If you happen to live in one of the eight states with full-service branches, you can also visit one of these branches in person to open your account.
The highly-rated Capital One mobile app makes it easy to automate your savings plan, transfer money between accounts, make mobile deposits, and track your savings progress.
Capital One Savings Account Downsides
Of course, no savings account is perfect. Here are a couple of potential downside for the Capital One 360 savings account.
No ATM cards
While some online savings accounts offer ATM cards so you can easily access your money from any ATM, Capital One does not. To access your money, you need to transfer your money to another account. If you have a Capital One checking account, your transferred funds will be available immediately. But if youâre transferring funds to a checking account with another bank, it can take a couple business days.
While this semi-restricted access can be a negative, it could also be a positive. After all, this is a savings account, not a checking account. And the harder it is to access your savings, the less likely you are to spend that money!
Comparatively few local branches
While I love the innovative Capital One Cafes (with their free Wifi, full coffee and snack bars, and personal assistance), there just arenât enough of them. Capital One currently has local branches in only eight states, most of which are on the East Coast.
Having said that, how often would you go to the local bank branch when Capital One makes it so easy to bank online?
How Does Capital One 360 Compare to Other Savings Accounts?
You have several good options when choosing a high-yield savings account. Many accounts make the same no-fee, no-minimum offer as the Capital One 360 Savings account. Hereâs a quick look at some of the most comparable online savings accounts (as of 30 April 2020):
Capital One 360 Savings
Discover Online Savings
Ally Online Savings
1.09%-1.55% introductory, 1.09% afterward
$100 minimum to open account
How Does the Capital One 360 savings rate compare to other savings accounts?
In terms of interest earned, the Capital One savings interest rate compares favorably to other similar savings accounts.
Other online savings accounts, like Ally and Discover, are currently offering rates between 1.40% and 1.55%. These are close to the Capital One 360 Savings rate of 1.50%.
While CIT Bank proudly offers up to 1.55% APY, you have to clear a hurdle to earn this rate. You must either maintain a balance of $25,000+ or make at least one monthly deposit of $100 or more. If you fail to meet one of these requirements, your savings rate will fall to 1.09%.
Of course, when you compare the Capital One saving interest rate to traditional bank accounts, Capital One comes out well ahead. Wells Fargo currently offers a maximum of 0.08%, and Bank of America rates max out at 0.06% (using Los Angeles local rates for comparison).
Is the Capital One 360 Savings account right for you?
The Capital One 360 Savings account is a solid option for the average person. Itâs easy to open and use, offers uncomplicated terms, and comes with one of the best interest rates available for a savings account with no monthly fees or minimum required balances.
If youâre a sophisticated investor, it might make more sense for you to keep your savings account with the bank that handles your investments (Ally Invest, for example) so you can easily move money between your investment accounts. But for most of us, the Capital One 360 Savings account is a perfectly suitable high-yield savings account.
When shopping for a home, many of us know our basic focal points, such as identifying the right neighborhood or finding a house with the ideal number of bedrooms and bathrooms. These factors are important, but there are other home features (some very large and some very small) that can greatly contribute to the enjoyment of your new home. Let’s make sure you don’t miss any of them.
Here are five opportunities to maximize the benefits of your purchase that go beyond just the house and why each one deserves your consideration.
Home Buying Consideration #1: The Garage
Garages are a very important feature for many homebuyers, and can even end up being a dealbreaker for some buyers. More than a parking spot, garages provide valuable storage and project space, as well as a way to protect your vehicles from all types of damage. When you are first shopping for a home, you may know that you want a garage, but you may not have considered all of the variables that go into the garage design, and which choice is right for you.
Garage Design: Why it Matters
When evaluating garage design, it’s important to start by considering what you may want to use the space for, and what external factors (such as weather) might impact your use. Here are several major garage design aspects to keep in mind as you house hunt.
Rental space: Depending on the size and layout of your garage, is there space that could be rented out full time, or used as a short-term rental to generate additional income? That extra income could be directed towards your mortgage payment.
Storage opportunities: Does the garage have room to store what you need to reduce in-home clutter? Is there space for shelves, or even room in the rafters?
Potential property value increase: According to the sales comparison approach (SCA), one of the most recognizable forms of valuing residential real estate, a “finished” garage that feels like an extension of the home’s indoor living space is one of several features that can increase overall home value. You may also want to consider the possibilities of eventually remodeling a bland garage in an otherwise perfect home.
Attached vs. Detached Garages: Pros vs. Cons
One of the biggest distinctions in garage design is whether a garage is attached or detached. Often influenced by lot shape (narrow lots on an alley often have detached garages, wider lots with a driveway often have attached garages) or the age of a home, having a detached or attached garage has both advantages and disadvantages.
Attached Garages: Pros
Convenient access to your cars, storage, and other items, particularly if you live in an area with an extreme climate
Attached garages are often less expensive to build, and can be climate controlled by accessing the electrical and HVAC systems that are part of the home
As attached garages are the most popular type of garage, having one typically increases the value of your home
Attached Garages: Cons
If you’re thinking of adding one, it may not be possible to fit on a narrow, urban lot
Since they offer direct access to the home, they can be a security and fire risk
They can be hard to add onto or expand, and any additions or changes might require more expensive permits and extensive inspections
Adding an attached garage, particularly to a vintage home, may look strange or otherwise detract from the exterior look of the home
Noisy garage activities may be heard more inside the home
Detached Garages: Pros
More flexibility in size, layout and location, lot size and shape permitting
It’s easier to add room for cars, storage, and projects, and to add onto if needed
Less fire and security risk to your home
Less of an impact to the look or curb appeal of your home
Can increase the resale value of your home
Detached Garages: Cons
Particularly in bad weather, less convenient in terms of access
Will require separate utilities, HVAC, and more
May not be allowed by your HOA or city permitting office
Now that we’ve examined the garage, let’s take a look at another key feature — what’s going on with the front and backyard?
Home Buying Consideration #2: The Yard
No longer limited to just a lawn, yards have now become an extension of the home. A convenient, well-designed outdoor living space is something that many homeowners desire. Yards can be great spaces for entertaining and are often much less expensive to create than comparable indoor entertaining spaces. Here are some important yard elements to consider.
Trees and landscaping: Important for both aesthetic and practical reasons, trees and landscaping can increase your yard’s appeal. A mature, well-designed landscape is valuable, as it represents an investment of both time and money.
Outdoor kitchen: Whether you are grilling for two or entertaining 200, an outdoor kitchen makes cooking fun and convenient.
Fireplace or fire pit: This stylish focal point makes it easy to keep enjoying your yard, even after dark or in cooler weather.
Automatic sprinklers, drip system, and misting system: Automatic sprinklers and drip systems can keep your yard looking lush for a low cost, and are particularly valuable in dry climates. Misting systems can also keep you cool on hot days.
Deck or Patio: A stylish outdoor surface makes it easy to enjoy your yard, and many new construction materials require little to no maintenance.
Shed: Well-designed sheds can go beyond storage, offering everything from a private workspace to extra space for guests to sleep.
So, you’re considering the finer points of a yard. But what about adding a body of water to that yard for cooling off on hot days? Here’s the pros and cons of investing in a water element for your next home.
Just starting your home search? Here’s the best time to begin.
Home Buying Consideration #3: The Pool
Pools and hot tubs are perhaps the most controversial of all outdoor home features. Some homebuyers totally avoid them, and some won’t look at a house without them. Which side are you on? Here are some factors to consider.
Backyard Pool and Hot Tub: Pros
Pools and hot tubs can be aesthetically pleasing
Both are also useful for entertaining
In warmer climates, pools can provide a way to enjoy the outdoors comfortably
If you like to swim, engage in other aquatic exercises regularly for fitness, or use a hot tub for muscle and joint pain, having your own can be convenient
In hot climates where pools are common (i.e., Arizona, California, Florida), having a pool can significantly increase the resale value of your home
Backyard Pool and Hot Tub: Cons
Both pools and hot tubs require regular maintenance that includes chemicals, cleaning, and repair
Many families with small children do not want a pool at home due to safety concerns
Your insurance cost may be higher, and your utility bills may go up as well, particularly for heating a pool
When it is time to sell your home, there are many buyers who will not want a house with a pool
A pool is a big decision that comes with both maintenance and benefits alike. You can always opt for a different kind of water feature, like a backyard stream. But if you’re looking to streamline your life, investing in home tech devices is almost a no-brainer.
Home Buying Consideration #4: The Appliances and Tech Gadgets
As technology improves and designs continually evolve, having up-to-date appliances and other devices in your home has become increasingly important. For example, while attractive kitchens are near the top of many house-hunters’ wish lists, there are items within those kitchens that can help — and items that can hurt — when it comes to increasing a home’s value.
Appliances That Can Help Property Value
Commercial-grade appliances: Particularly in high-end properties, many buyers expect to see appliances from luxury or professional brands.
Smart devices: Thermostats, fire detectors, carbon monoxide detectors, security cameras, door locks, and doorbells are just a few of the relatively new smart home devices that homebuyers are now beginning to appreciate and even expect.
Appliances That Can Hurt Property Value
Old and energy inefficient: These power-sucking products will cost you in both your utility bill, and the resale value of your home.
Homes totally lacking certain appliances: Is your property missing a dishwasher, indoor laundry, or other key features? This can be a major turn-off for buyers who don’t want to have to complete a complicated remodeling and installation project.
Mismatched appliances: Appliances from different eras or in different colors can make your kitchen look unfinished and low-quality, even if your other finishes are fantastic.
Looking to stock up on home amenities? We’ve targeted the seasonal best deals for doing so.
Now that you’ve considered the key interior and exterior components of your dream home, there’s one last important element to contemplate: the driveway.
Home Buying Consideration #5: The Driveway
Walkways and driveways connect your home to the outside world and play a crucial role in the curb appeal of your residence. Although often overlooked, they are important home features that can be messy and expensive to replace or update.
If you are evaluating the driveway at a potential home, or considering an update at your current home, the first choice you will need to make is whether you want asphalt or concrete. Both have benefits and drawbacks that may vary depending on your climate, landscape, and usage needs.
Today, many homeowners and buyers are also looking for something beyond the basics, with driveway design trends including elaborate paving materials, irregular shapes, and additional features like extra parking for guests.
Know the Tricks, Now Land the House
Although these five features may not be your first considerations in the house-hunting process, they are important elements that you will use or interact with nearly every day. Add them to your consideration list, and you will be sure to end up in a customized home that you enjoy and treasure. If you’ve found your ideal home with all the right features, reach out to a PennyMac Loan Officer today or apply online to get pre-approved for the loan that’s right for you.
You don’t have a separate rating called aÂ mortgageÂ credit score, but lenders do look at your score, credit history and several other factors when deciding whether to approve you for a homeÂ loan. Contrary to what some people think, though, you don’t necessarily need an excellent orÂ good credit score to get a homeÂ loan. How high your score is depends on your current financial situation, downÂ payment and other factors.
What Does MyÂ Credit Score Need to Be for a Mortgage?
The short answer is that it depends.Â Mortgage lenders will do a hard inquiryÂ on your credit to see the score and the details behind it. YourÂ credit score is typically a good first impression on how risky of an investment you are.Â Mortgage lenders don’t want to be left holding the keys to your home if you don’t or can’t make regularÂ monthly payments, or if you makeÂ late payments, on your homeÂ loan.
Factors that can impact whether yourÂ credit score is high enough to be approved for a mortgage include:
What type of homeÂ loan you’re seeking
How much otherÂ debt you have
The details of your credit history, such as positive and negative items reported toÂ theÂ credit bureaus
The size of your downÂ payment
FHA mortgage loans may be among the easiest loans to get in terms ofÂ credit score requirements. Individuals whoÂ qualify as first-time home buyers under FHA (Federal Housing Administration) backed lending programsÂ may be ableÂ toÂ qualify for mortgage approval with aÂ credit score as low as 580 and a low downÂ payment of only 3.5%. In cases where buyers can put forward 10% or more for a downÂ payment, some lenders may approve individuals with FICO scoresÂ as low as 500.
For moreÂ conventional loansâthose that meet theÂ underwriting standards put forth by Freddie Mac or Fannie Macâapproval usually requires aÂ good credit score. At minimum, these types of loans usually require a FICO score of around 620, but that assumes other factors are in your favor. A lower downÂ payment orÂ higher credit utilization, among other things, could mean you need aÂ higher credit score to secure mortgage approval.
What Is a DecentÂ Credit Score for a Mortgage?
The answer is probably 620 or higher. You do want to minimize any surprises during the mortgage application and home buying process. Take the following steps to avoid this risk.
Get a look at yourÂ credit score andÂ report. If you haveÂ bad credit, consider taking steps toÂ improve your credit score.
Dispute or work with a credit repairÂ company to fix any inaccuracies on theÂ report before you apply for a mortgage.
Evaluate whether your credit history and score positions you to achieve your homeownership goals now or if you should take time toÂ improve your scoreÂ organically first.
Research the mortgage processÂ so you understand how it works.
Consider working with a mortgage broker if you’re uncomfortable with the entire process. These pros can often help you understand which type of mortgage is right for you and howÂ toÂ qualify for it.
Can YouÂ Buy a House with aÂ Credit Score of 590?
You may be ableÂ toÂ qualify for an FHA or nontraditional homeÂ loan with a lowÂ credit score. Your chances of doing so are higher if you can tie your low score to a single issue and you otherwise have a strong credit history. You can also increase your chances by lowering your credit utilization rate, having a lowÂ debt-to-income ratio and saving up to put a large percent down when you buy the home.
Should You Get a Mortgage with Your CurrentÂ Credit Score?
Ask yourself this important question: Are you so preoccupied with whether you can get approved for a mortgage with your currentÂ credit score that you forgot to ask yourself whether you should?
YourÂ credit score impacts more than whether or not aÂ lender approves you for a homeÂ loan. It also impacts yourÂ loan and term options, which can impact the overall cost of the home. One of the most important parts of the mortgage that may be tied directly to yourÂ credit score is the interest rate.
A good orÂ bad credit score can mean a shift up or down for your mortgage interest rate. And even a fraction of a percent in either direction can drastically change how much youÂ pay for your home. Consider the examples below, which are applied to a $200,000 homeÂ loan for a term of 30 years.
An interest rate of 3.92% equals payments of $946 per month and a total home cost of $340,427 over 30 years.
An interest rate of 4.42% equals payments of $1,004 per month and a total home cost of $361,399 over 30 years.
An interest rate of 4.92% equals payments of $1,064 per month and a total home cost of $382,999 over 30 years.
Just a difference of 1% can result in savings (or losses) of more than $40,000 over the life of your mortgage. Use Credit.comÂ toÂ check credit score andÂ creditÂ report card to make sure yourÂ credit score is as high as possible before you start the mortgage application process.
The post What Should My Mortgage Credit Score Be? appeared first on Credit.com.
A wealth tax is a type of tax thatâs imposed on the net wealth of an individual. This is different from income tax, which is the type of tax youâre likely most used to paying. The U.S. currently doesnât have a wealth tax, though the idea has been proposed more than once by lawmakers. Instituting a wealth tax could help generate revenue for the government but only a handful of countries actually impose one.
Wealth Tax, Definition
A wealth tax is what it sounds like: a tax on wealth. This can also be referred to as an equity tax or a capital tax and it applies to individuals.
More specifically, a wealth tax is applied to someoneâs net worth, meaning their total assets minus their total liabilities. The types of assets that may be subject to inclusion in wealth tax calculations might include real estate, investment accounts, liquid savings and trust accounts.
A wealth tax isnât the same as other types of tax youâre probably familiar with paying. For example, you might be used to paying income tax on the money you earn each year, self-employment tax if you run a business or work as an independent contractor, property taxes on your home or vehicles and sales tax on the things you buy.
Instead, a wealth tax has just one focus: taxing a personâs wealth. According to the Tax Foundation, only Norway, Spain and Switzerland currently have a net wealth tax on assets. But a handful of other European countries, including Belgium, Italy and the Netherlands, levy a wealth tax on selected assets.
How a Wealth Tax Works
Generally, a wealth tax works by taxing a personâs net worth, rather than the income they earn in a given year. In countries that impose a wealth tax, the tax is only levied once assets reach a certain minimum threshold. In Norway, for instance, the net wealth tax is 0.85% on stocks exceeding $164,000 USD in value.
Wealth taxes can be applied to all of the assets someone owns or just some of them. For example, the wealth tax can include securities and investment accounts while excluding real property or vice versa.
Every country that imposes a wealth tax, whether itâs a net tax or a tax on selected assets, can set the tax rate differently. Itâs not uncommon for there to be exemptions or exclusions to who and what can be taxed this way.
A wealth tax can be charged alongside an income tax to help generate revenue for the government. The wealth tax rates are typically lower than income tax rates, in terms of the actual percentage rate, but that doesnât necessarily mean paying less in taxes. Someone who has substantial assets that are subject to a wealth tax, for instance, may end up paying more toward that tax than income tax if theyâre able to reduce their taxable income by claiming tax breaks.
Is a Wealth Tax a Good Idea?
In countries that use a wealth tax, the revenue helps to fund government programs and organizations. In some places, such as Norway, revenue from the wealth tax is split between the central government and municipal governments. It would be up to the federal government to decide how wealth tax revenue should be allocated if one were introduced here.
In the U.S., the concept of a wealth tax has been used to argue for a redistribution of wealth. Or more specifically, lawmakers who back the tax have suggested that it could be used to more fairly tax the wealthy while relieving some of the tax burdens on lower and middle-income earners. While wealthier taxpayers may take advantage of loopholes to minimize income taxes, a wealth tax would be harder to work around, at least in theory. That could yield benefits for less wealthy Americans if it means theyâd owe fewer taxes.
That sounds good but implementing and collecting a wealth tax may be easier said than done. Itâs possible that even with a wealth tax in place, high-net-worth and ultra-high-net-worth taxpayers could still find ways to minimize the amount of tax theyâd owe. And the tax itself could be seen as unfairly penalizing wealthier individuals who own charities or foundations, invest heavily in businesses or save and invest their money instead of using it to buy things like luxury cars, expensive homes or other physical assets.
Itâs important to keep in mind that a wealth tax is targeted at people above certain wealth thresholds, so most everyday Americans wouldnât have to pay it. But it could cause problems for someone who unexpectedly receives a large inheritance that increases his wealth, even if his income remains at the lower end of the scale.
The Bottom Line
In the U.S., the wealth tax is still just an idea thatâs being floated by progressive politicians and lawmakers. Whether a wealth tax is ever implemented remains to be seen and itâs likely that debate over it may continue for years to come. And enforcing one could be difficult if it were ever introduced, if for no other reason than there are many ways for the extremely wealthy to avoid taxes. In the meantime, talking with a tax professional may be the best way to manage your own personal tax liability.
Tips on Taxes
Consider talking to your financial advisor about the best ways to handle taxes as you grow an investment portfolio. If you donât have a financial advisor yet, finding one doesnât have to be complicated. SmartAssetâs financial advisor matching tool can help you connect with professional advisors online. It takes just a few minutes to get your personalized financial advisor recommendations. If youâre ready, get started now.
Managing taxes is an important part of growing wealth and creating an estate plan. The less you pay in taxes, the more money you have to save and invest toward establishing a legacy of wealth. A free income tax calculator is a good way to start figuring what you owe or to get confirmation that your calculations are correct.
Karen, our editor at Quick and Dirty Tips, has a friend named Heather who listens to the Money Girl podcast and has a money question. She thought it would be a great podcast topic and sent it to me.
I had a financial crisis and ended up with a $2,500 balance on my new credit card, which had a no-interest promotion for 18 months when I got it. That promotional rate is going to expire in a couple of months. I have good credit, and I keep getting offers from other card companies for zero-interest balance transfer promotions. Would it be a good idea to apply for another card and transfer my balance so I don't have to pay any interest? Are there any downsides that I should watch out for?
Thanks, Karen and Heather! That's a terrific question. I'm sure many podcast listeners and readers also wonder if it's a good idea to transfer a balance multiple times.
This article will explain balance transfer credit cards, how they make paying off high-interest debt easier, and tips to handle them the right way. You'll learn some pros and cons of doing multiple balance transfers and mistakes to avoid.
What is a balance transfer credit card or offer?
A balance transfer credit card is also known as a no-interest or zero-interest credit card. It's a card feature that includes an offer for you to transfer balances from other accounts and save money for a limited period.
You typically pay an annual percentage rate (APR) of 0% during a promotional period ranging from 6 to 18 months. In general, you'll need good credit to qualify for the best transfer deals.
Every transfer offer is different because it depends on the issuer and your financial situation; however, the longer the promotional period, the better. You don't accrue one penny of interest until the promotion expires.
However, you typically must pay a one-time transfer fee in the range of 2% to 5%. For example, if you transfer $1,000 to a card with a 2% transfer fee, you'll be charged $20, which increases your debt to $1,020. So, choose a transfer card with the lowest transfer fee and no annual fee, when possible.
When you get approved for a new balance transfer card, you get a credit limit, just like you do with other credit cards. You can only transfer amounts up to that limit.
Missing a payment means your sweet 0% APR could end and that you could get charged a default APR as high as 29.99%!
You can use a transfer card for just about any type of debt, such as credit cards, auto loans, and personal loans. The issuer may give you the option to have funds deposited into your bank account so that you can send it to the creditor of your choice. Or you might be asked to complete an online form indicating who to pay, the account number, and the amount so that the transfer card company can pay it on your behalf.
Once the transfer is complete, the debt balance moves over to your transfer card account, and any transfer fee gets added. But even though no interest accrues to your account, you must still make monthly minimum payments throughout the promotional period.
Missing a payment means your sweet 0% APR could end and that you could get charged a default APR as high as 29.99%! That could easily wipe out any benefits you hoped to gain by doing a balance transfer in the first place.
How does a balance transfer affect your credit?
A common question about balance transfers is how they affect your credit. One of the most significant factors in your credit scores is your credit utilization ratio. It's the amount of debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your available credit limits.
For example, if you have $2,000 on a credit card and $8,000 in available credit, you're using one-quarter of your limit and have a 25% credit utilization ratio. This ratio gets calculated for each of your revolving accounts and as a total on all of them.
Getting a new balance transfer credit card (or an additional limit on an existing card) instantly raises your available credit, while your debt level remains the same. That causes your credit utilization ratio to plummet, boosting your scores.
I recommend using no more than 20% of your available credit to build or maintain optimal credit scores. Having a low utilization shows that you can use credit responsibly without maxing out your accounts.
Getting a new balance transfer credit card (or an additional limit on an existing card) instantly raises your available credit, while your debt level remains the same. That causes your credit utilization ratio to plummet, boosting your scores.
Likewise, the opposite is true when you close a credit card or a line of credit. So, if you transfer a card balance and close the old account, it reduces your available credit, which spikes your utilization ratio and causes your credit scores to drop.
Only cancel a paid-off card if you're prepared to see your credit scores take a dip.
So, only cancel a paid-off card if you're prepared to see your scores take a dip. A better decision may be to file away a card or use it sparingly for purchases you pay off in full each month.
Another factor that plays a small role in your credit scores is the number of recent inquiries for new credit. Applying for a new transfer card typically causes a slight, short-term dip in your credit. Having a temporary ding on your credit usually isn't a problem, unless you have plans to finance a big purchase, such as a house or car, within the next six months.
The takeaway is that if you don't close a credit card after transferring a balance to a new account, and you don't apply for other new credit accounts around the same time, the net effect should raise your credit scores, not hurt them.
RELATED: When to Cancel a Credit Card? 10 Dos and Don’ts to Follow
When is using a balance transfer credit card a good idea?
I've done many zero-interest balance transfers because they save money when used correctly. It's a good strategy if you can pay off the balance before the offer's expiration date.
Let's say you're having a good year and expect to receive a bonus within a few months that you can use to pay off a credit card balance. Instead of waiting for the bonus to hit your bank account, you could use a no-interest transfer card. That will cut the amount of interest you must pay during the card's promotional period.
When should you do multiple balance transfers?
But what if you're like Heather and won't pay off a no-interest promotional offer before it ends? Carrying a balance after the promotion means your interest rate goes back up to the standard rate, which could be higher than what you paid before the transfer. So, doing another transfer to defer interest for an additional promotional period can make sense.
If you make a second or third balance transfer but aren't making any progress toward paying down your debt, it can become a shell game.
However, it may only be possible if you're like Heather and have good credit to qualify. Balance transfer cards and promotions are typically only offered to consumers with good or excellent credit.
If you make a second or third balance transfer but aren't making any progress toward paying down your debt, it can become a shell game. And don't forget about the transfer fee you typically must pay that gets added to your outstanding balance. While avoiding interest is a good move, creating a solid plan to pay down your debt is even better.
If you have a goal to pay off your card balance and find reasonable transfer offers, there's no harm in using a balance transfer to cut interest while you regroup.
Advantages of doing a balance transfer
Here are several advantages of using a balance transfer credit card.
Reducing your interest. That's the point of transferring debt, so you save money for a limited period, even after paying a transfer fee.
Paying off debt faster. If you put the extra savings from doing a transfer toward your balance, you can eliminate it more quickly.
Boosting your credit. This is a nice side effect if you open a new balance transfer card and instantly have more available credit in your name, which lowers your credit utilization ratio.
Disadvantages of doing a balance transfer
Here are some cons for doing a balance transfer.
Paying a fee. It's standard with most cards, which charge in the range of 2% to 5% per transfer.
Paying higher interest. When the promotion ends, your rate will vary by issuer and your financial situation, but it could spike dramatically.
Giving up student loan benefits. This is a downside if you're considering using a transfer card to pay off federal student loans that come with repayment or forgiveness options. Once the debt gets transferred to a credit card, the loan benefits, including a tax deduction on interest, no longer apply.
Tips for using a balance transfer credit card wisely
The best way to use a balance transfer is to have a realistic plan to pay off the balance before the promotion expires.
The best way to use a balance transfer is to have a realistic plan to pay off the balance before the promotion expires. Or be sure that the interest rate will be reasonable after the promotion ends.
Shifting a high-interest debt to a no-interest transfer account is a smart way to save money. It doesn't make your debt disappear, but it does make it less expensive for a period.
If you can save money during the promotional period, despite any balance transfer fees, you'll come out ahead. And if you plow your savings back into your balance, instead of spending it, you'll get out of debt faster than you thought possible.
Being a homeowner comes with all kinds of pros and cons that donât come with renting. You have a yard, but you have to care for the yard. You have a payment, but you get to deduct your mortgage interest on your tax return! And while the Tax Cuts and Jobs Act (TCJA) reduced or eliminated many of the benefits homeowners used to enjoy, there are a few tax deductions you, as a homeowner, can still claim on your 2018 income taxes, including:
Home mortgage points
Property tax expenses
Mortgage insurance costs
American homeownership has long been subsidized by tax savings, and if your real estate agent didnât tell you about them, we cover some here or anÂ accountant or tax preparer can tell you more.
âThe path to owning a home has a great deal of tax benefits, and a discussion with your tax professional will help to clarify the details,â says William Slade, a certified financial planner in California and enrolled agent licensed by the IRS.
Slade says he is regularly asked if home improvements, such as adding rooms, remodeling and landscaping help reduce taxes. âThey donât when theyâre first done, but they may help when the property is sold by increasing the cost basis and lowering the gains tax on the sale,â he says.
Changes for the 2018 Tax Year
New homeowners should know that things have shifted a bit for the 2018 tax year. The standard home mortgage interest point deduction has been modified by the TCJA. More on that lower down.
What hasnât shifted is that you still have to itemize income tax deductions in Schedule A in order to claim a deduction on home mortgage interest. Schedule A is more complicated than the standard deduction, which you may have taken in previous years. But the savings can make it worth doing.
Itemized deductions for new homeowners include more than just mortgage interest though. Property taxes, private mortgage insurance costs and even charitable contributions can be deducted. To get your mortgage interest deduction, you have to itemize with Schedule A. You can add up these other deductions there and get a bigger overall tax reduction.
Sadly, the previous moving expenses deduction is gone for all but those on active military duty. So, if you just moved in this past year and arenât serving your country, too bad. No added deduction for you.
Tax Deductions Available for Homeowners
Tax breaks help cushion the impact of mortgage payments. So, take full advantage of those available to you.
The Mortgage Loan Interest Deduction
Mortgage points are prepaid interest on home mortgages. Under the home mortgage points deduction, mortgage loan interest is tax deductible if you itemize. The TCJA capped the deduction on interest paid on up to $750,000 for a qualified home loan taken out after December 15, 2017. Loans taken out before that date still qualify for up to $1,000,000 of deductible interestâthe previous cap. Note:Â if you use the Married Filing Separately status, you can only claim half of that amount on your own return.
When you itemize your deductions, you can add your mortgage loan interest to the list if you purchased the home before December 15, 2017.Â The deduction applies for up to $1 million for loans that you used to improve the home or buy a new home. Purchases made after this date can only deduct interest on $750,000 of the home acquisition debt. This is down $250,000 from previous years. These new tax laws are set to expire in 2025, and after that point, the $1 million limit may return.
Property Tax Deduction
State and local property taxes are still deductible on your federal tax return under the state and local taxes deductions, known as the SALT deduction. TCJA modified this one. For the 2018 tax year, the amount you can claim for your property taxes is limited to $10,000. For many taxpayers, that still covers you well. For those in states with high property taxes, it could dampen deductions considerably.
Mortgage Insurance Tax Deduction
Private mortgage insurance (PMI) is deductible still. There are changes here too though. PMI is used by people whose home loan or refinance loan is 80% or more of the purchase price, AKA their down payment lower than 20%.
To deduct your PMI for the 2018 tax year:
Your loan had to be taken out in 2007 or later
The home has to be your primary residence or a second home that youâre renting out
Your adjusted gross income (AGI) has been less than $109,000 for any deduction and lower than $100,000 for the full deductionâyou can use Schedule A to calculate your deduction amount
Another lesser-known credit for a homeowner is the energy tax credit, called the Nonbusiness Energy Property Credit.Â This deduction is getting reduced through 2021 but can be claimed using Form 5695. This tax credit is limited to 10% of the cost of your qualifying energy. Items that qualify under this credit include skylights, insulation systems, and certain qualifying appliances like water heaters and central air conditioners. Some restrictions apply.
You can also take advantage of the Residential Renewable Energy Tax Credit. This one is a credit for using solar, wind, fuel-cell and geothermal energy sources, including solar water heaters.
TheÂ Residential Energy Efficiency Property Credit can be used to deduct 30% of the cost of solar, wind, fuel-cell and geothermal equipment at your main home or wind, solar and geothermal equipment at a second home. The deduction is unlimited for all but fuel-cells, which are capped at $500 per each half-kilowatt of capacity or $1,000 per kilowatt.
How Much Can Homeowners Really Save?
The amount of money you can save on your annual income taxes depends on a number of factors including filing status, standard deduction amount, the other itemized deductions youâre claiming and total taxable income. Total savings are a mystery until you itemize while doing your tax forms.
There are also things you canât deduct when filing your taxes too. These items include any dues you pay to your homeowner’s association, the home ownerâs insurance on your home, the appraisal fees you paid when buying your home and the cost of nonenergy-related improvements. Some home improvements can reduce your taxes when you sell your home, but you’ll need to keep good records of everything and hold onto the receipts.
This article was originally published February 23, 2013, and has since been updated by another author.
The post Homeowners Get a Tax Credit for Buying a House appeared first on Credit.com.
Since the outbreak of the coronavirus pandemic in March 2020, life and business certainly have changed. If you’re self-employed full-time or earn business income on the side of a day job, you may be wondering what economic relief applies to you.
Let's review what relief Congress passed to help self-employed Americans cope with financial challenges. I’ll review ten key stimulus benefits that apply to solopreneurs and small businesses.
If you're experiencing economic hardship due to the coronavirus, using some of these new regulations may be the ticket to managing your personal and business finances better.
10 ways the self-employed can get financial relief
The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27 as the largest stimulus legislation in American history since the New Deal in the 1930s. Here are ten ways it provides relief for individual solopreneurs and small business owners.
1. Getting lower interest rates
On March 3, the central U.S. bank, also known as the Federal Reserve or Fed, made a surprising emergency interest rate cut of half a percentage point. That’s the largest single rate cut since the financial crisis of 2008. While this move wasn’t part of a coronavirus stimulus package, it was an aggressive cut meant to prepare the economy for problems the pandemic was expected to cause.
An economic recovery could take a few years, which likely means the Fed rate will stay near zero through 2023.
In mid-September, the Fed reiterated its promise to keep interest rates near zero until the economy improves and the unemployment rate declines. They indicated that a recovery could take a few years, which likely means the Fed rate stays near zero through 2023.
While savers never celebrate low interest rates, they're beneficial to borrowers. In general, the financing charge on variable-rate credit cards and lines of credit goes down in lockstep with interest rates. Carrying a balance on your personal and business credit cards may be slightly less expensive, depending on your card issuer and type. For instance, if your card’s annual percentage rate or APR is 20%, your adjusted rate could go down to 19.5%.
If you have a fixed-rate credit card, the APR doesn’t change no matter what happens in the economy or with federal interest rates. Also, note that if you pay off your balance in full each month, a credit card’s APR is irrelevant because you don’t pay interest on purchases.
2. Having more time to file taxes
Earlier this year, the due date for filing and paying 2019 federal taxes was postponed from April 15, 2020, to July 15, 2020. You didn't have to be sick or negatively impacted by COVID-19 to qualify for this federal tax delay. It applied to any person or business entity with taxes due on April 15, 2020.
If you missed the tax filing deadline, be sure to request an extension.
Most businesses make estimated tax payments each quarter. Those payment dates have shifted, too. The 2020 schedule gives you more time as follows:
The first quarter was due on July 15, 2020, which changed from April 15, 2020
The second quarter was due on July 15, 2020, which changed from April 15, 2020
The third quarter was due on September 15, 2020
The fourth quarter is due on January 15, 2021
Individuals and businesses can request an automatic extension to delay filing federal taxes. But it doesn’t give you more time to pay what you owe for 2019, only more time to submit your tax form—until October 15, 2020.
If you missed the tax filing deadline, be sure to request an extension. Individuals must file IRS Form 4868, and most incorporated businesses use IRS Form 7004.
However, depending on where you live, you may have to pay state income taxes, which have not been postponed. If you need a state tax filing extension, check with your state’s tax agency to determine what’s possible.
Taxes due on any date other than April 15, 2020—such as sales tax, payroll tax, or estate tax—don’t qualify for relief.
3. Getting more time to contribute to retirement accounts
You typically have until April 15 or the date of a tax extension to make traditional IRA or Roth IRA contributions for the prior year. But since the CARES Act postponed the federal tax filing deadline, you also have until July 15 or October 15, 2020 (if you requested an extension) to make IRA contributions for 2019.
However, this deadline doesn't apply to retirement accounts you may have with an employer, such as a 401(k). Nor does it apply to self-employed accounts, such as a solo 401(k) or SEP-IRA, which correspond to the calendar year.
4. Getting more time to contribute to an HSA
Like with an IRA, you typically have until April 15 or the date of a tax extension to make HSA contributions for the prior year. Under the CARES Act, you now have until July 15 or October 15, 2020, to make HSA contributions for 2019.
To qualify for an HSA, you must be covered by a qualifying high-deductible health plan. In early March, the IRS issued a notice that a high-deductible health plan may cover COVID-19 testing and treatment and telehealth services before meeting your deductible. And just as before the coronavirus, you can pay for medical testing and treatment using funds in your HSA.
5. Delaying tax on retirement withdrawals
While you typically must pay income tax on retirement account withdrawals that weren’t previously taxed, the good news is that for a period, you can delay or avoid tax altogether. The CARES Act gives you two options for withdrawals made in 2020:
Repay a hardship distribution within three years to your retirement account. You can replace the funds slowly or all at once, with no change to your annual contribution limit. If you take money out but return it within three years, it’s like you never took a distribution.
Pay taxes on a hardship distribution from your retirement account evenly over three years. If you can’t pay back your distribution, you can ease your tax burden by paying one-third of your liability for three years.
Since withdrawing contributions from a Roth retirement account doesn’t trigger income taxes, it’s a good idea to tap a Roth before a traditional retirement account when you have the option.
6. Skipping early withdrawal penalties
Most retirement accounts impose a 10% early withdrawal penalty if you take make withdrawals before age 59.5. Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.
Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.
For instance, if you, your spouse, or a child gets diagnosed with COVID-19 or have financial challenges due to being laid off, quarantined, or closing a business, you qualify for this penalty exemption. You can withdraw up to $100,000 of your retirement account balance during 2020 without penalty. However, income taxes would still be due in most cases.
The no-penalty rule applies to workplace retirement plans, such as 401(k)s and 403(b)s. It also applies to IRAs, such as traditional IRAs, Roth IRAs, and SEP-IRAs.
Since you make after-tax contributions to Roth accounts, you can withdraw them at any time (which was also the case before the CARES Act). However, the earnings portion of a Roth is subject to income tax if you withdraw it before age 59.5.
7. Getting larger retirement plan loans
Some workplace retirement plans, such as 401(k)s and 403(b)s, permit loans. Typically, you can borrow 50% of your vested account balance up to $50,000 and repay it with interest over five years.
You can delay the repayment period for a retirement plan loan for up to one year.
For retirement plans that allow loans, the CARES Act doubles the limit to 100% of your vested balance in the plan up to $100,000. It applies to loans you take from your account until late September 2020, for coronavirus-related financial needs.
You can delay the repayment period for a retirement plan loan for up to one year. For example, if you have $20,000 vested in your 401(k), you could take a $20,000 loan on September 30, 2020, and delay the repayment term until September 30, 2021. You’d have payments stretched over five years, ending on September 30, 2026. Any amount not repaid by the deadline would be subject to tax and a 10 percent early withdrawal penalty.
Note that individual retirement accounts—such as traditional IRAs, Roth IRAs, and SEP-IRAs—don’t allow participants to take loans, only hardship distributions.
8. Suspending student loan payments.
Starting on March 13, 2020, most federal student loans went into automatic forbearance until September 30, 2020, due to the CARES Act. On August 8, the suspension of student loan payments was extended through December 31, 2020.
On August 8, the suspension of student loan payments was extended through December 31, 2020.
The suspension covers the following types of loans:
Direct Loans that are unsubsidized or subsidized
Direct PLUS Loans
Direct Consolidation Loans
Federal Family Education Loans (FFEL)
Federal Perkins Loans
Note that FFEL loans owned by a private lender or Perkins loans held by your education institution don’t qualify for automatic forbearance. However, you may have the option to consolidate them into a Direct Loan, which would be eligible for forbearance. Just make sure that once the suspension ends, your new consolidated interest rate wouldn’t rise significantly.
During forbearance, qualifying loans don’t accrue additional interest. Even if you have federal student loans in default because you haven’t made payments, zero percent interest applies during the suspension period.
Additionally, missed payments during the suspension don’t get reported to the credit bureaus and can’t hurt your credit. Qualifying payments you skip also count toward any federal loan repayment or forgiveness plan you’re enrolled in.
However, if you want to continue making student loan payments during the suspension period, you can. With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.
With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.
If you’re not sure what type of student loan you have or the pros and cons of consolidation, contact your loan servicer. Even if your student loans are with private lenders or schools, they may offer relief if you request it.
9. Having Paycheck Protection Program (PPP) loans forgiven
The PPP is part of the CARES Act, and it supports small businesses, organizations, and solopreneurs facing economic hardship created by the pandemic. The program began providing relief in early April 2020, and the application window ended in early August 2020.
Participating PPP lenders coordinated with the Small Business Administration (SBA) to offer loans to businesses in operation by February 15, 2020, with fewer than 500 employees. Loan amounts could be up to 2.5 times the average monthly payroll up to $10 million; however, annual salaries were capped at $100,000.
For a solopreneur, the maximum PPP loan was $20,833 if your 2019 net profit was at least $100,000. The calculation is: $100,000 / 12 months x 2.5 = $20,833.
When you spend at least 60% on payroll and 40% on rent, mortgage interest, and utilities, you can have those amounts forgiven from repayment. Payroll includes payments to yourself, but you can’t cover benefit costs, such as retirement contributions, or payments to independent contractors.
In other words, a solopreneur could have received a PPP loan for up to $20,833, paid the entire amount to themselves, and not repaid it by having the load forgiven. Using a PPP loan for qualifying expenses turns it into a grant.
The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.
However, if you have employees, the PPP forgiveness calculations and requirements are more complex. For example, you must maintain reasonable salaries and wages. If you decrease them by more than 25% for any employee (including yourself) who made less than $100,000 in 2019, your forgiveness amount will be reduced.
PPP loan forgiveness also depends on keeping any full-time employees on your payroll. But if you had employees who left your company voluntarily, requested a cut in hours, or got fired for cause during the pandemic, your loan forgiveness amount won’t be reduced for those situations.
The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.
However, not all states have issued their rules on taxing PPP forgiveness. So be sure to get guidance if you live in a state with income tax.
You must complete a PPP Loan Forgiveness Application and get approved by your lender to qualify for forgiveness. The paperwork should come from your lender, or you can download it from the SBA website at SBA.gov. Most PPP borrowers have from six months after loan disbursement or until the end of 2020 to spend the funds.
The forgiveness application explains what documents you must include, and they vary depending on whether you have employees. Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan can be forgiven.
If some or all of a PPP loan isn't forgiven, you typically must repay it within five years at a 1 percent fixed interest rate. You don't have to start making payments for ten months after loan disbursement, but interest will accrue during a deferral period.
10. Getting SBA loans
In addition to PPP loans, the Small Business Administration (SBA) offers several loans for businesses and solopreneurs facing economic hardship caused by a disaster, including the COVID-19 pandemic.
Economic Injury Disaster Loan (EIDL) can be up to $2 million and repaid over 30 years at an interest rate of 3.75 percent. You can use these funds for payroll and other operating expenses.
SBA Express Bridge Loans gives borrowers up to $25,000 for help overcoming a temporary loss of revenue. However, you must have an existing relationship with an SBA Express lender.
SBA Debt Relief is a program that helps you make payments on existing SBA loans for up to six months.
Depending on your state, you may qualify for unemployment assistance, which allows self-employed people, who typically are ineligible for unemployment benefits to get them for a period.
This isn’t a complete list of all the economic relief available for small businesses and solopreneurs. There are federal tax initiatives, funds from local and state governments, and help from private organizations that you may find by doing a search online.
How to manage money in uncertain times
When it comes to surviving uncertainty, such as how COVID-19 will affect the economy, those who have emergency savings will feel much less financial stress than those who don’t. That’s why it’s essential to maintain a cash reserve of at least three to six months’ worth of living expenses in an FDIC-insured bank savings account.
If you don’t need to dip into your emergency fund, continue shoring it up when possible. If you don’t have a cash reserve, accumulate savings by cutting non-essential expenses, and even temporarily pausing contributions to retirement accounts. That’s a better option than succumbing to panic and tapping your retirement funds early.
If you don’t need to dip into your emergency fund, continue shoring it up when possible.
If you find yourself in a cash crunch, contact your creditors before dipping into any retirement accounts you have. Many lenders will be willing to work with you to suspend payments or modify existing loan terms temporarily.
RELATED: How to Reduce Money Anxiety—Compassionate Advice from a Finance Pro
My new book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, covers many strategies to earn more, manage variable income, and create an automatic money system so you can strengthen your financial future. It’s a great resource if you’re thinking about earning side income or have already started a business.
Many economic factors that affect your personal and business finances aren’t under your control. Instead of worrying, look around, and figure out how you can create more income or cut unnecessary expenses. Working on tasks that you can control gives you more clarity and helps manage stress in uncertain times.
I love making things automatic. Whether it is bill-paying, direct deposit, prescription renewals, or investing, making things automatic makes life easier, and that is where our Betterment investing review comes in.
When it comes to retirement planning, an overwhelming number of online tools and websites promise to help you create a dynamic and profitable portfolio while minimizing fees.
This growing list of services includes robo-advisors, a class of financial websites that offer to manage your portfolio with minimal in-person interaction and a heavy reliance on the latest investing tools and software.
One of the most popular robo-advisors by far is Betterment. Conceptualized by its founders in 2008, Betterment has since grown to help its customers invest billions of dollars of their hard-earned dollars. This is an investment platform that puts your investing on cruise control, and even allows you to make money watching TV! You can open an account with no money at all, and get the benefit of professional, low-cost investment management that enables you to invest in thousands of securities with as little as a few hundred dollars.
It hasnât been easy. With other competitors like Wealthfront and Personal Capital always a few steps behind them, Betterment has struggled to find a way to stand out. Even with the competition, Betterment has emerged as one of the top online brokerage accounts and continues to grow its market share.
Open an account
0.25% to 0.40% annual management fee, depending on the plan
No trade, transfer or rebalancing fees
No minimum balance
Hands-off investing tailored to your goals and risk preference
Betterment is an online, automated investment manager that uses advanced algorithms and software to find the perfect investment strategy for your portfolio and individual needs.
The main difference between investing your money with a traditional financial advisor and Betterment is that there is minimal human interaction. Unless you email or call in, your communication with an individual advisor will be very minimal.
But, there is some good news to counteract the lack of individual service. Because of lower operating costs, Betterment is able to charge lower fees than traditional financial advisors. This can be huge for individuals who want to take a hands-off approach to their retirement accounts, yet donât want to pay top dollar for access to a top-tier financial advisor in their area.
Using complex investment software, Betterment allocates your investment portfolio based on your individual circumstances, investment time horizon, and thirst for risk.
In the meantime, they keep fees at a minimum by using ETFs (exchange-traded fund) that let you have a diversified portfolio, like mutual funds, but are tradeable much like stocks.
Since ETFs come with very low expense ratios, Betterment is able to pass those savings along to the consumer. Although the program already manages over $16 billion for their clients, they are still growing at a rapid pace.
Because the service is able and willing to deal with investors at all stages of wealth accumulation, it has become a go-to for both experienced and novice investors with various investing goals.
Further, Bettermentâs portfolio strategy isnât geared just for retirement savings; the service can also improve your returns on dollars you invest for short-term and medium-term goals like saving for college, taking an annual vacation, or building up a cash reserve.
How Betterment Works
Like post other robo-advisors, Betterment provides complete, automated investment management of your portfolio. When you sign up for the service, youâll complete a questionnaire that will determine your risk tolerance, investment goals, and time horizon. From that information, Betterment determines your portfolio will be designed as conservatives, aggressive, or some level in between.
Over time however, Betterment may adjust your portfolio to become gradually more conservative. For example, as you move closer to retirement, your asset allocation will be gradually shifted more heavily in favor of safe investments, like bonds.
Your portfolio will be constructed of exchange traded funds (ETFs), which are low-cost investment funds designed to track the performance of an underlying index. In this way, Betterment attempts to match the performance of the underlying indexes, rather than to outperform them. For this reason, investing with Betterment â and most other robo-advisors â is considered to be passive investing. (Active investing involves frequent trading of stocks and other securities in an attempt to outperform the market.)
Betterment also uses allocations based on broad investment categories. There are three in total:
Safety Net â These are funds allocated for near-term needs, such as an emergency fund.
Retirement â This will naturally be your long-term investment account and held in tax-sheltered IRAs.
General Investing â This allocation is dedicated to intermediate goals, maybe saving for the down payment on a house or even for your childrenâs education.
Given that each of the three broad goals has a different time horizon, the specific portfolio allocation in each will be a little bit different. For example, the Safety Net will be invested in cash type accounts for safety and liquidity.
Betterment Advantages And Disadvantages
Thereâs no minimum investment required.
The low annual fee of 0.25% on the Digital plan can allow you to have a $20,000 account managed for just $50 per year, or a $100,000 account for just $250.
Tax-loss harvesting is available at all taxable accounts.
Betterment Premium provides unlimited access to certified financial planners, providing a service similar to traditional investment advisors, but at a fraction of the cost.
The No-fee Checking and Cash Reserve give you cash management options to go with your investing activities.
Betterment offers several portfolio options, including Smart Beta, Socially Responsible Investing, and the BlackRock Targeted Income Portfolio.
The use of value funds also adds the potential for your investment accounts to outperform the general market, since value stocks tend to be underpriced relative to their competitors.
Flexible Portfolio will give you some control over your investment allocations, which is a feature absent from most robo-advisors.
Bettermentâs annual advisory fee is on the low end of the robo-advisor range. But there are some robo-advisors charging no fees at all.
Betterment doesnât offer alternative investments. These include natural resources and real estate, which are offered by some of their competitors.
External account syncing is available only with Betterment Premium.
The Betterment Investment Methodology
Like most other robo-advisors, Betterment manages your investment account using Modern Portfolio Theory, or MPT. The theory emphasizes proper allocations into various asset classes over individual security selection.
Your portfolio is divided between six stock asset allocations and eight bond asset allocations. Each allocation is represented by a single ETF thatâs tied to an index specific to that asset class. The single ETF will provide exposure to scores or even hundreds of securities in each asset class. That means collectively your investment will be spread across thousands of securities in the US and internationally.
The six stock asset allocations are as follows:
US Total Stock Market
US Value Stocks â Large Cap
US Value Stocks â Mid Cap
US Value Stocks â Small Cap
International Developed Market Stocks
International Emerging Markets Stocks
The eight bond asset allocations are as follows:
US High Quality Bonds
US Municipal Bonds (will be held in taxable investment accounts only)
US Inflation-Protected Bonds
US High-Yield Corporate Bonds
US Short-Term Treasury Bonds
US Short-Term Investment Grade Bonds
International Developed Market Bonds
International Emerging Markets Bonds
Since Betterment offers tax-loss harvesting with taxable investment accounts, most asset classes will have two or three very similar ETFs. This will enable Betterment to sell a losing position in one ETF to reduce capital gains in winning asset classes. Alternative ETFs are then purchased to replace the sold funds to maintain the target asset allocations in your account.
Tax-loss harvesting is becoming an increasingly popular investment strategy because it effectively defers capital gains taxes into future years. Itâs available only for taxable accounts, since tax-sheltered accounts have no immediate tax consequences.
How Betterment Compares
Here’s how Betterment compares to the previously mentioned companies, Wealthfront and Personal Capital.
Minimum Initial Investment
0.25% on Digital; 0.40% on Premium (account balance over $100k)
0.25% on all account balances
0.89% on most account balances; reduced fee on balances > $1 million
On Premium Plan only
Yes, on all taxable accounts
Yes, on all taxable accounts
Yes, on all taxable accounts
Yes, on Premium Plan only
Betterment Accounts and Options
For the first few years of Bettermentâs existence they offered a single investment account serving as a one-size-fits-all plan. But thatâs all changed. They still offer basic investment accounts, but they now give you a choice of multiple investment options.
This is Bettermentâs basic investment plan. There is no minimum initial investment required, nor is there a minimum ongoing balance requirement. Betterment charges a single fee of 0.25% on all account balances.
You can also add any other portfolio variations, except the Goldman Sachs Smart Beta portfolio, which has a $100,000 minimum account balance requirement.
Betterment Premium works similar to the Digital plan, but it delivers a higher level of service. The plan provides external account synching, giving Betterment a high altitude view of you your entire financial situation. External investment accounts can help in enabling Betterment to better coordinate your portfolio allocations with assets held in outside accounts. They can also make recommendations out to better manage those external accounts.
And perhaps the biggest advantage of the Premium plan is that it comes with unlimited access to Bettermentâs certified financial planners. In this way, Betterment is competing more directly with traditional investment advisors, but doing it with a robo-advisor component.
Youâll need a minimum of $100,000 to invest in the Premium plan, and the annual advisory fee is 0.40%. Thatâs just a fraction of the usual 1% to 2% typically charged by traditional investment advisory services.
Betterment Cash Reserve
The account pays a variable interest rate, currently set at 0.40% APY. Betterment doesnât actually hold these funds directly, but rather invest them through participating program banks.
Thereâs no fee for this account, and you can move money as often as you want. And for those with very high cash balances, the account is FDIC insured for up to $1 million through the program banks.
Betterment Socially Responsible Investing (SRI)
SRI portfolios are becoming increasingly popular in the robo-advisor space. It involves investing in companies that meet certain standards for social, environmental, and governance guidelines. Betterment indicates that the ETFs they use in their SRI portfolio have produced a 42% increase in their social responsibility scores.
SRI portfolios work with both the Digital and Premium plans, using a similar investment methodology. But they make certain modifications, holding ETFs based on SRI in place of the ETFs used in non-SRI portfolios.
SRI portfolios do not require a minimum balance and charge no additional fees. And like their Digital and Premium plans, taxable SRI investment accounts take advantage of tax-loss harvesting.
Betterment Flexible Portfolios
The key word in the name is âflexibleâ because the main feature is adding personal options to your portfolio allocations.
This is done by adjusting the individual asset class weights in your portfolio. For example, if you have a 7% allocation in emerging markets, you may choose to increase it to 10% if you believe that sector is likely to outperform others. But you can also decrease the allocation if it makes you feel uncomfortable.
Betterment Tax-Coordinated Portfolio
This is less of a formal portfolio and more of an investment strategy. It must be used in combination with a taxable investment account and a tax-sheltered retirement account. Betterment will then allocate investments based on their tax impact.
For example, income generating assets â that produce high dividend and interest income â are held in a tax-sheltered account. Investments likely to generate long-term capital gains are held in a taxable investment account, since you will be able to take advantage of lower long-term capital gains tax rates.
Goldman Sachs Smart Beta
This option is for more sophisticated investors, and requires a minimum account balance of $100,000. And since it is a high risk/high reward type of investing, it also requires a higher risk tolerance.
Betterment uses the same basic investment strategy as they do in other portfolios. But itâs an actively managed portfolio that will be adjusted in an attempt to outperform the general market. Securities will be bought and sold within the portfolio and can include either individual securities or Smart Beta ETFs.
The portfolio has many variations, including a wide range of allocations. Stocks are chosen based on four qualities: good value, strong momentum, high quality, and low volatility.
And like other portfolio variations Betterment offers, there is no additional fee for this option.
BlackRock Target Income Portfolio
Betterment recognizes that some investors are more interested in income than growth. This will particularly apply to retirees. The BlackRock Target Income Portfolio invests in portfolios based on your risk tolerance. This can mean low, moderate, high, or even aggressive.
Those categories may seem unusual for an income generating portfolio. But while the portfolio attempts to minimize risk of principal, it also recognizes that some investors are willing to add risk to their portfolio in exchange for higher returns.
A low-risk portfolio may have a higher allocation in US Treasury securities. An aggressive portfolio may center primarily on high-yield corporate bonds or even emerging-market bonds that have higher interest rates due to greater risk.
Betterment No-fee Checking
Provided by Betterment Financial LLC in partnership with NBKC Bank, this is a true no-fee checking account. Not only are there no monthly maintenance fees, but there are also no overdraft or other fees. Theyâll even reimburse all ATM fees and foreign transaction fees you incur. And thereâs not even a minimum balance requirement.
Youâll be provided with a Betterment Visa Debit Card with tap-to-pay technology, that you can use anywhere Visa is accepted. All account balances are FDIC insured for up to $250,000. And as you might expect from a company on the technological cutting edge, you can deposit checks into the account using your smartphone.
Check out our full Betterment checking review.
Betterment Key Features
Minimum initial investment: Betterment requires no funds to open an account. But you can begin funding your account with monthly deposits, like $100 per month. This method will make it easier to use dollar-cost averaging to gradually move into your portfolio positions.
Available account types: Joint and individual taxable investment accounts, as well as traditional, Roth, rollover and SEP IRAs. Betterment can also accommodate trusts and nonprofit accounts.
Portfolio rebalancing: Comes with all account types. Your portfolio will be rebalanced when your asset allocations significantly depart from their targets.
Automatic dividend reinvestment: Betterment will reinvest dividends received in your portfolio according to your target asset allocations.
Betterment Mobile App: You can access your Betterment account on your smartphone. The app is available for both iOS and Android devices.
Customer contact: Available by phone and email, Monday through Friday, from 9:00 am to 8:00 pm, Eastern time.
Account protection: All Betterment accounts are protected by SIPC insurance for up to $500,000 in cash and securities, including up to $250,000 in cash. SIPC covers losses due to broker failure, not those caused by market value declines.
Financial Advice packages: Betterment offers one-hour phone conferences with live financial advisors on various personal financial topics. Five topics are covered:
Getting Started package: This package gives new users the professional vote of confidence they need as a professional will assess their account setup. $199
Financial Checkup package: This package takes it a step further, providing the customer with a professional opinion on their portfolio and financial circumstances. $299
College Planning package: As its name implies, this package helps parents who are investing with the goal of paying for their childrenâs college education in the next 5-18 years. $299
Marriage Planning package: Merging finances can be tricky, so Betterment created this plan to help engaged couples and newlyweds to succeed as they unite their lives and assets. $299
Retirement Planning package: Your investment goals and strategies change as you near retirement. This particular package helps keep you on target to meet them. $299
Retirement Savings Calculator: Robo-advisors are popular choices for retirement accounts. For this reason, Betterment offers the Calculator to help you project your retirement needs. By entering basic information in the calculator (it will sync external accounts if you have a Premium account â including employer-sponsored retirement plans) it will let you know if you are on track to meet your goals or if you need to make adjustments.
How To Sign Up For A Betterment Account
The Betterment sign up process is one of the most user-friendly out there for any brokerage. It comes with easy-to-follow instructions and as streamlined registration process which users can navigate through in a matter of minutes.
First get the process started by clicking the button below.
Sign up for a Betterment Account
After the initial sign up process, users can expect a simple transaction as they transfer funds into the account, much like moving money from a checking to savings account.
When you begin the sign-up process, youâll be given a choice of four different investment goals:
I chose âInvest for retirementâ. It will ask your current age, your annual income, then give you a choice of accounts to use. That includes a traditional, Roth, or SEP IRA, or even an individual taxable account. I selected a traditional IRA.
Based on a 30-year-old with a $100,000 income, Betterment return the following recommendation:
You even have the option to have the specific asset allocations listed. After clicking âContinueâ, youâll be asked to provide your email address and create a password. Youâll then be taken to the application, which will ask for general information, including your name, address, phone number, and how you heard about Betterment.
Once your account has been set up, you can fund it immediately, by connecting your bank account, or by setting up recurring deposits.
You can also set up other accounts, such as âManage spending with Checkingâ or âInvest for a long-term goalâ.
Why You Should Open An Account With Betterment
While nearly anyone who invests could benefit from the online portfolio management and advising, this service is definitely geared to certain types of investors. In most cases, Betterment will work best for:
Hands-off investors who have some investing knowledge â Since it takes care of the heavy lifting for you, it works best for investors who want to take a hands-off approach to their investment portfolio. Passive investors can let Betterment handle the logistics while using online account management to keep a close eye on their accounts.
Novice investors who need help â Beginning investors who are just learning the ropes can turn to Betterment for online portfolio management with low fees. The many online tools and user-friendly interface make it easy for beginners to get a grasp on basic financial concepts and investing strategies.
Robo-advisors are growing in popularity and could easily replace in-person advisors in the near future. With lower fees and advanced software that can maximize results, online investing is certainly gaining an edge.
Whether Betterment is right for you depends on your individual needs and investing goals. If youâre a hands-off investor who wants to grow your retirement funds without paying a lot of fees, then Betterment might be ideal. Additionally, beginning investors can benefit handsomely from the online tools and investing education offered through the Betterment website.
If you think Betterment investing might be exactly what your portfolio needs, sign up for a new account today.
However, if you determine that you would be better served by a more hands-on approach, check out the other online brokerage account options. Being a certified financial planner, I have had a chance to work with several of these platforms and have done the following reviews:
Motif Investing Review
Lending Club Review
Ally Invest Review
The post Betterment Investing Review: Make Investing Automatic appeared first on Good Financial CentsÂ®.
It can take several months to prepare for the bar exam, and they are some of the most important months in an aspiring lawyerâs life. In that time, many students take preparation courses or devote all their time to studying and preparing, increasing their chances of passing the exam and taking that important step.
Bar loans are a type of financial aid offered to students going through this difficult time. A bar loan can provide them with essential living costs, while covering the cost of academic materials and preparation fees. That way, they can focus on whatâs important, and donât have to worry about getting a part-time job and spending time away from their studies.
What is a Bar Loan?
Also known as a bar study loan, a bar loan is a type of private loan offered by private lenders. Unlike federal student loans, they are not backed by the Department of Education and, as a result, are subject to the same standards and criteria as personal loans.
You have two main options for taking out a bar loan. The first is to simply borrow more money than you need during your last year of school, covering you for all costs during that final year and running over into the bar loan afterward.Â
Alternatively, you can submit a separate application and acquire your loan via one of the bar loan lenders we have listed below. To determine how much you need, simply calculate your living expenses and other costs and contact a lender.
Pros of a Bar Study Loan
Provide you with the freedom to study without worrying about how youâll afford everything.
You can apply even after you have graduated.
You can borrow more money than you need, which isnât always possible with student loans.
Move you one step closer to achieving your goal
Cons of a Bar Study Loan
Charge higher interest rates than most other student loans
Youâre not covered or protected like you are with student loans
Need good credit to apply
The Best Bar Loans
You can get bar study loans from many major banks, credit unions, and lenders. We have shortlisted a few of our favorites below to help you:
Discover Student Loans
Discover is best known for its credit cards, including the Discover It, which we have highlighted many times on this website. But it also offers a host of additional banking services, including private loans and bar loans.
You can get a loan of between $1,000 and $16,000 for up to 20 years, with both fixed-rates and variable rates available, typically between 7% and 13%. There are no fees for applying, missing payments or pre-paying.
To apply, you must either be in your final year or have graduated within the last 6 months.
A trusted lender that has been in the student loan business for decades, Sallie Mae offers up to $15,000 for 15 years, with interest rates as low as 4.5% and as high as 11.56%. You can apply up to 12 months after graduation and there are no loan fees. Whatâs more, you wonât be asked to make any loan payments while youâre still in school.
Wells Fargo options are a little more restrictive, as you can only borrow a maximum of $12,000 over a maximum of 7 years. Whatâs more, you need to be enrolled in an eligible school or have graduated within 30 days, so if you graduated more than a month ago then youâll need to look at one of the two listed above.
Do You Need A Bar Loan?
You need money to get through this period as you likely wonât have time to work and study, and if you try and force it your studies may suffer. If youâre still living at home, as many students are, your parents may cover most of your living costs. Assuming they can also cover your additional expenses, you wonât need a bar loan.
However, if they canât afford to pay your fees or rent, youâll need to consider one of the following options:
While a traditional part-time job can be overly taxing during this busy period, you may have some time to freelance. It is easier than ever to earn a little extra cash by writing, designing, coding, and even doing some simple consulting work.
Youâre a lawyer, not a writer, but if youâve made it this far it means youâve completed countless essays and assignments and have a good grasp of the English language. You likely canât compete with professional writers getting the big bucks, but you can certainly compete with those at the bottom end of the scale and earn upwards of $20 an hour for your time.
If the idea of writing doesnât appeal to you, think about consulting work. Many smaller companies and individuals canât afford to spend hundreds of dollars an hour on legal fees, not when they just need a little legal advice concerning their property or business. Instead, they turn to students who have the knowledge but donât demand the same high fee.
Ask Your Employer
If you have a job lined up after graduation, your employer may cover some or all of your fees. However, you will need to make a commitment, agreeing to work with them for at least a few years after you have graduated.
A bar loan is a specialized personal loan and may charge higher fees then you can get with a traditional personal loan. If you have a good credit score, you should consider applying for a traditional loan, comparing this to the bar study loan to see which one offers the best fees.
Bottom Line: A Life-Changing Loan
A bar loan can hurt your credit score and give you even more debt to worry about, but at the same time, it means you wonât have to worry about money while you study and focus on your future.
Ultimately, thatâs the main goal here, because as damaging as that extra debt could be in the short term, if you eventually get the job of your dreams then youâll have more than enough money to clear the balance and focus on your future.
Guide to Bar Loans: Pros, Cons, and More is a post from Pocket Your Dollars.