What to Do If Your Company Doesn’t Offer a Retirement Plan

Working for a company with no retirement plans doesn't mean you can't create your own.

The ability to divert part of your paycheck to an investment account and build a nest egg is a huge advantage in the grand scheme of life. In fact, much of the American workforce relies on employer-sponsored retirement plans to do so.

But while we think of retirement accounts as part of a standard workplace benefits package, the reality is that not every employer offers a tax-advantaged retirement plan. The good news is that it’s possible to save for retirement on your own. Here’s how:

Start with an Individual Retirement Account (IRA)

If you have earned income, you are eligible to open an IRA. It’s possible to contribute up to $5,500 to an IRA in 2017. Individuals over the age of 50 can contribute an extra $1,000 each year to “catch up” on their retirement savings. There are two main types of IRAs to choose from:

Traditional IRA

When you contribute to a traditional IRA, you receive a tax deduction. Your investment broker will send you a statement at the end of the year so you know how much to deduct.

Because you receive a tax deduction now, you will have to pay taxes later when you withdraw money from your retirement account. You can start withdrawing money at age 59 and a half, and pay taxes on it at your marginal rate.

Note that if you or your spouse has a retirement plan through work, or if you have a higher income, your deduction eligibility phases out with a traditional IRA.

Roth IRA

With a Roth IRA, you make contributions with after-tax money, and the investments grow tax-free. So, you don’t get a tax advantage today, but you don’t have to worry about paying taxes on your future withdrawals.

Although this sounds pretty great, it’s important to note the income restrictions on the Roth IRA. Your ability to contribute phases out starting at $118,000 a year as a single filer in 2017. Once you reach $133,000 in income for the year, you can’t contribute to a Roth IRA at all. Instead, you might need to switch to a traditional IRA.

Choosing Between a Traditional & Roth IRA

Making this decision mainly focuses on your expected tax situation. If you think your taxes will be higher in the future, you can save money by paying taxes now at a lower rate and using a Roth IRA. However, if you think your tax bill will decrease later, try to avoid paying taxes today with the help of a traditional IRA contribution tax deduction.

Other IRA Options

Do you have a side gig on top of your full-time job? If so, use that as a reason to access some of the self-employed IRA options, such as SIMPLE IRA and SEP IRA accounts.

These IRA accounts often allow a higher yearly contribution than a traditional or Roth IRA. For 2017, the SIMPLE allows up to $12,500 in contributions each year with a $3,000 potential catch-up contribution. The SEP IRA has a limit of the lesser of 25 percent of your compensation or $54,000 for 2017.

Open Your IRA

Opening an IRA is relatively simple. You can open an IRA account with most online brokers and investors. Some even allow you to open an account with no minimum or opening balance. Other brokers might require a regular monthly contribution of $100 to create an account.

Many brokers offer access to low-cost index funds and ETFs for instant diversity and a reduction in fees. Set up an automatic transfer from your checking account into your investment account.

Consider talking to your human resources department to see if you can have part of your paycheck diverted to your IRA. Even if you don’t have an employee retirement plan, you can still passively generate savings for your future self.

See how debt affects your ability to save with a free credit report snapshot on Credit.com.

Consider the myRA

A few years ago, the government started an IRA alternative called the myRA. If you have a small amount to contribute, this can be ideal. You contribute as little as $5 per paycheck. Your tax-deductible contribution is invested in the Government Securities Fund. Your annual contribution limit and tax benefit is in line with a traditional IRA.

Once your account balance reaches $15,000, or after 30 years, you have to move the money into a private IRA. Plus, you don’t have as many choices for investing with the myRA. Your money has to go into the specified fund. Because the barrier to entry is so low, it’s a good starter retirement account as long as you plan to upgrade later.

Open a Health Savings Account (HSA)

Health care costs can present a challenge during retirement. One way to address this issue, especially if your employer doesn’t offer a retirement plan, is with the HSA.

Not only do you receive a tax deduction for your contributions, but also the money grows tax-free as long as you use it for qualified health-related costs. While you can use the money now, it’s a good strategy to let the money grow. Plan to use the HSA for health care costs during retirement to capitalize on long-term, tax-free growth.

Once you reach 65, you can treat your HSA like a traditional IRA (with most of the same rules). However, integrating the HSA into your overall plan by using it in conjunction with an IRA can help you maximize your assets during retirement.

Are You Eligible for a Solo 401(k)?

Another option for those with side gigs is the solo 401(k). If you have a side business on top of your work, and you don’t have any employees, you can take advantage of higher 401(k) limits by opening a solo 401(k). One advantage to the Roth solo 401(k) is that it doesn’t come with the income restrictions you see with a Roth.

A solo 401(k) comes with a very generous contribution limit. On the employee side, you can contribute up to $18,000 for 2017. Your business can also contribute a percentage of income (20% or 25%, depending on your type of business). For those 50 and over, contributions to a participant’s account, not counting catch-up contributions, can’t exceed $54,000

These accounts are harder to find than IRAs. You might need to speak with a specialty brokerage or your bank to open a solo 401(k).

Taxable Investment Accounts

Finally, you don’t have to limit yourself to tax-advantaged retirement accounts. Any regular brokerage account can help you save for retirement. Brokers such as Acorns and Robinhood can help you invest pocket change for the future.

When investing through taxable investment accounts, though, you need the discipline to avoid withdrawing the money before you retire. Taxable investment accounts don’t restrict your access in the same way, so it can be tempting to raid your retirement fund for today’s expenses.

Get Started Now

Regardless of your employer’s involvement, you need to make room in your budget for retirement savings. No matter how you go about it, the important thing is to start investing with retirement in mind. The earlier you start, the more time your money has to grow.

Image: Portra

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Here’s What You Need to Know Before Withdrawing Money From Your IRA

Before you take money out of your IRA, make sure you understand what’s expected of you.

One of the key pieces to retirement planning is understanding when and how much you can withdraw from your account.

Your individual retirement account comes with rules about when you can withdraw money and how much you must withdraw each year. Understanding IRA withdrawal rules is vital if you want to avoid paying penalties.

Why Are There IRA Withdrawal Rules?

It’s your money, so why are there rules about withdrawing from an IRA?

The government offers you a tax benefit when you invest using an IRA. As a result, the government expects you to use this tax-advantaged money for its intended purpose — retirement — and sets rules accordingly.

When you break the IRA withdrawal rules, you are subject to a penalty. This penalty can be hefty, depending on the circumstances. Additionally, the penalty depends on the type of IRA you have. There are slightly different rules for traditional and Roth IRA accounts. (You can learn about the differences between traditional and Roth IRAs here.)

Before you take money out of your IRA, make sure you understand what’s expected of you.

Traditional IRA Withdrawal Rules

The rules for withdrawing from a traditional IRA are more stringent than those for a Roth IRA. When you contribute to a traditional IRA, the money is pre-tax, meaning you get a tax deduction for your contributions. (Here’s a quick guide to common tax deductions.)

As a result — except for specific circumstances — the IRS expects you to keep your money in the account for a long period of time.

Withdrawing From an IRA Before Age 59½

If you take money out of your traditional IRA before you reach age 59½, you are subject to a 10% penalty. That penalty is on top of the federal and state income taxes you owe on the withdrawal.

There are exceptions to this rule. You can avoid the penalty if you withdraw the money for the following reasons:

  • Buying a home for the first time
  • Disability
  • Qualified education expenses
  • Health insurance (if you are unemployed)
  • Medical expenses that weren’t reimbursed

If you go this route, talk to a tax professional and use IRS Form 5329 to ensure you aren’t penalized.

Regular Retirement Withdrawals

During your “regular” retirement years, which start at age 59½, you can take money from your retirement account to cover any expenses you have. Though you won’t face penalties, you will be taxed at your marginal rate for withdrawals since they are considered part of your income.

Withdrawing From an IRA at Age 70½

Once you reach age 70½, you must take withdrawals from your traditional IRA. Up until this age, you aren’t required to take money out of your IRA if you don’t want to. However, at age 70½, you must take the required minimum distribution (RMD).

Your RMDs are based on a formula that takes into account the amount in your IRA and your life expectancy. If you don’t take the required amount, you will face a penalty of 50% of the amount you should have withdrawn.

Consult with a financial professional to help you figure out the best way to withdraw money from your IRA between age 59½ and 70½ to reduce the pain caused by RMD. A financial professional can help you create a plan that also takes into account the impact of Social Security benefits. Coordinate your benefits and plan withdrawals for best results.

Roth IRA Withdrawal Rules

Roth IRA withdrawal rules are a little different. Because you contribute after-tax dollars to this account, reaping no immediate benefit, some of the rules are more flexible. However, you still need to be aware of potential pitfalls and penalties.

Withdrawing From Your Roth IRA

With this type of account, it’s important to make the distinction between your contributions and your earnings.

Say you invest $5,000 in your Roth IRA each year for two years. During that time, your account grows to $16,000. In this case, your contributions total $10,000 and your earnings come to $6,000.

You can withdraw your original contributions anytime without tax or penalty. This is the money you put in after-tax, and you can use it to pay for anything.

Once you start dipping into your earnings, however, you’ll face extra charges. Tap into the earnings from your Roth IRA before you reach age 59½ and you’ll pay a 10% penalty. Plus, an early withdrawal could be subject to tax — something you normally don’t pay on Roth IRA earnings if you withdraw after age 59½.

One nice bonus of a Roth IRA? There are no RMDs associated with this account type. It doesn’t matter how old you are — you will never be forced to take money out of your Roth.

The Five-Year Rule

You need to be aware of the five-year rule with your Roth IRA. This regulation states that initial contributions to your Roth IRA must be made at least five years before you start withdrawing earnings.

Say you’re 57 when you start contributing to a Roth IRA. In that case, you can’t actually start withdrawing your earnings at age 59½ without triggering a penalty — since the five years hasn’t been met. You need to wait until you are at least 62 to satisfy the rule.

In the end, IRA withdrawal rules are fairly straightforward. If you have questions, consult a tax professional before you take money from your IRA. That way, you have a plan in place.

Image: Tom Merton

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Buying a House? You May Want to Avoid the 30% Rule

The 30% rule is a good place to start, but it’s not always the best gauge of how much should you spend on housing.

Ask someone the question, “How much should I spend on a house?” and there’s a good chance that they will respond with the 30% rule.

The 30% rule, which says not to spend more than 30% of your income on housing, is a good place to start, but it’s not always the best gauge of how much should you spend on housing. You don’t want to base your entire financial situation on it — especially since it’s not exactly clear what that 30% includes.

What Is the 30% Rule?

The 30% rule has been around since the 1930s, according to the Census Bureau. Back then, policymakers were trying to make housing affordable. They came up with the idea that you could spend about 30% of your income on housing and still have enough left for other expenses.

Over time, those numbers started to get used in home loans as well. A rough sketch of what you could afford, in terms of monthly payment, could be obtained by estimating 30% of your income.

Is the 30% Rule Right for You?

When deciding on your own 30% rule, it’s probably a good idea to base it on your take-home pay, rather than your gross income. Let’s say you bring home $3,500 a month. According to the 30% rule, that means you shouldn’t spend more than $1,050 on your housing payment.

Some folks like to use their gross income for this calculation, but that can get you into trouble in the long run. If you base what you spend on housing on an amount that you might not be bringing home, that can stress your budget.

Think about it: If your pre-tax pay is $3,800 a month, that lifts your max housing payment to $1,140. That’s $90 more per month. But the reality is that you are bringing home $300 less than your gross income. Trying to come up with another $90 a month could put a strain on your budget.

Don’t Forget About Extra Costs

You can use a mortgage calculator to figure out how much you should spend on housing. However, such calculators typically just include principal and interest. This doesn’t take into account other monthly homeownership costs.

If you’re thinking of buying an expensive house, don’t forget about other costs like insurance and taxes.

Experts suggest that you base your 30% figure on all your monthly payment costs, not just the principal and interest.

What Percentage of Income Should Be Spent on Housing?

But it goes beyond that for some homebuyers. When looking into buying a home or an affordable place to rent, don’t just base your estimates on your monthly payment. You should also include estimated utility costs and an estimate for maintenance and repairs.

HouseLogic suggests you budget between 1% and 3% of your home’s purchase price annually for repairs and maintenance. I like the idea of budgeting 2%. So, on a $200,000 home, that means you can expect to pay $4,000 for repairs and maintenance — about $333.33 per month.

Once you start adding in all the other aspects of homeownership, suddenly that 30% rule is less cut-and-dry. If you’re more conservative, adding up all the monthly costs of homeownership and keeping it all under 30% makes sense.

You’re less likely to overspend that way. But it might mean a smaller, less expensive home.

Consider the 28/36 Qualifying Ratio

Instead of relying on the 30% rule to answer the question, “How much should I spend on a house?”, consider using the 28/36 qualifying ratio.

According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.

So, if you make $3,800 in take-home pay, your monthly payment should be no more than $1,064. But, things get stickier when you calculate the 36% part of the ratio. Your total debt payments shouldn’t exceed $1,368. That leaves you about $304 for payments of other debts.

Let’s say your credit card and auto loan payments total $500. That means you’re going to have to adjust your expectations for what you can expect to pay for a mortgage. In fact, if your lender insists on the 36 part of the ratio, you have $196 less you can spend on your mortgage payment. And that might mean a less expensive house.

When figuring out what percentage of income you should spend on housing, base the calculations on your take-home pay. Even though Re/Max says many lenders use your gross pay for the 28/36 qualifying ratio, this way you’ll play it safe.

How Much Should I Spend on a House?

Everyone has to answer the “How much should I spend on a house?” question for themselves. However, the biggest reason to ditch the 30% rule is that you might not be comfortable with it.

Are you really comfortable spending 30% of your income each month on your housing? When you consider your other payment obligations, does it makes sense for you to spend so much on housing?

If you aren’t sure about the 30% rule, use your own rule. You might be more comfortable with 25% on all of your housing costs. Or perhaps you modify the rule. Maybe you spend 20% on mortgage and interest and keep your total housing costs to 25% or 28%.

No matter what you decide, the important thing is to be responsible with your finances. Only spend what you feel comfortable with on housing or rent.

Image: Portra

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5 Things Every Student Loan Borrower Needs to Know

Here are five things you definitely need to know as a student loan borrower.

Have you looked at the cost of attending college recently? The price of tuition and fees has increased, on average, $280 per year for the last decade, according to College Board. That adds up over time, so it’s no wonder many turn to student loans to afford their education.

But now that you’re approaching the end of college — or perhaps you’re already done — it’s time to figure out how you’re going to repay those loans. Before you make a decision about how to move forward, here are five things you need to know as a student loan borrower.

1. The Difference Between Federal & Private Student Loans

The first step in deciding how to pay off your college debt is knowing whether you have federal or private student loans.

Federal student loans are issued by the government. These loans have interest rates set by Congress and come with certain protections and benefits (like income-driven repayment options, deferment/forbearance and loan forgiveness).

Private student loans, on the other hand, are issued by financial institutions. They usually have higher interest rates than the loans you get from the government. Private loans don’t come with the same benefits as federal loans. But some of the best lenders will offer options to borrowers who experience financial hardship.

To simplify the repayment process, you can consolidate all of your federal loans together to make one payment each month. But you can’t include private loans in a federal consolidation.

On the other hand, if you refinance your loans privately, you can include federal and private loans together in one big loan. However, once you refinance your federal loans, you lose those benefits and protections mentioned above.

When I was faced with this choice, I consolidated my federal loans and refinanced my private loans separately. Sure, I made two payments for a while until I paid off the private loans. But this ensured that the bigger chunk of my debt — my federal loans — retained protection.

2. When & How to Enroll in an Income-Driven Repayment Plan

If you can’t afford your student loan payments, there is hope. If you have federal loans, you can set up a repayment plan based on your income.

The government offers income-based repayment plans for different situations. Your payment each month is limited to a percentage of your income. At the end of a set term, if you still have some federal student debt left, the remaining balance is forgiven.

You can’t get income-based repayment for private student loans, however. If you refinance federal student loans privately, you lose access to income-driven repayment options.

Be careful when choosing income-driven repayment, though. A longer loan term and a lower monthly payment can mean that you actually end up paying more than you expected over time. On top of that, there is a good chance that loan forgiveness might come with hefty tax consequences.

There are a number of student loan forgiveness programs that can help you with your student loan debt.

3. How Much You Owe & to Whom

By the time you’re done with college, it’s not surprising if you don’t know exactly how much you owe. Thankfully, this is a simple problem to solve.

The Department of Education will usually assign a servicer to your account. Private lenders usually will, too. Your loan servicer is the middleman between you and your student loan lender. They’re in charge of facilitating payments, making sure the terms of the loan are met and working out a payment plan if you’re struggling to keep up.

Of course, if you have several student loans, you probably also have several servicers. And it’s not always easy to figure out who they are.

To find federal student loan information about what you owe and who services your loan, go to the National Student Loan Data System. Select “Financial Aid Review” and accept the terms and conditions. You will need your FSA ID, but you can create one if you don’t have one yet. Once you’re in, you can see how much you owe, how much you’re paying in interest and how to contact your loan servicer.

When it comes to private student loans, the best way to find out who services them is by checking your credit reports. Your credit report will list all your open accounts. (You can view a free snapshot of your credit report, with updates every two weeks, on Credit.com.)

4. Refinancing Your Student Loans Can Save You Thousands

If you want to save thousands of dollars over the life of your loans, refinancing your student loans can be a solid option. Depending on your credit and income, it’s possible to get a much lower interest rate through refinancing.

Refinancing means taking out a new loan with a private lender to pay off your existing loans. The goal is to consolidate student loans, get a lower rate and/or secure a new repayment term.

The decision to refinance should be made carefully, however. Again, refinancing federal loans with a private lender means forfeiting many government-backed benefits.

Check with different lenders to see what rate you can get if you refinance. Also, consider your eligibility for income-driven repayment. Many high-earning professionals with a lot of student loan debt don’t qualify for income-driven plans. In such cases, it can make sense to refinance privately to take advantage of long-term savings.

5. Extra Payments Can Cut Years Off Your Repayment (& Save You Money)

Finally, making extra payments can help you save more money over time. If you don’t want your student loan debt hanging over your head, you can pay it off faster as your income increases.

Extra payments reduce your principal balance. That cuts down how much you pay in interest and the how long it takes to pay off your debt. Consider refinancing to a lower interest rate, then making extra payments to supercharge your savings and pay off your loans faster.

You can even use a student loan prepayment calculator to see just how much time and money you’ll save.

Student loans are a necessity for most of us. However, they don’t have to prevent you from living a good life. Explore all these options and figure out what is likely to work best for your situation.

Image: Mixmike

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Will Trump’s Big Health Care Plan Give You Money Trouble?

Here's how to prepare your funds for a Trump presidency.

On Monday, President Donald Trump addressed a joint session of Congress (and the nation). In his speech, he shared his blueprint for the country’s future.

Many of his remarks centered on national security, jobs and taxes, but the item on many minds was health care.

Following a spate of town hall meetings in which angry constituents confronted their Republican representatives, Trump laid out his vision for replacing the Affordable Care Act (ACA, also called Obamacare).

Trump’s health care plan, if enacted by the Republican-controlled Congress, is likely to have an impact on your bottom line. Here’s how.

5 Health Care Principles in Donald Trump’s Speech

Trump’s speech to Congress included five principles he wants to see in the ACA’s replacement plan.

1. Keep Coverage for Pre-Existing Conditions

Trump insists that any replacement of the ACA should keep the coverage requirement for pre-existing conditions. If you’re staring down a medical condition, you should still be covered, assuming Trump gets his way.

2. Continue Tax Credits & Expand HSAs

Trump wants to continue offering tax credits to those who need help paying for health insurance (something that’s currently offered under the ACA). He also wants to expand the use of Health Savings Accounts (HSAs).

3. Offer States ‘Resources and Flexibility’ for Medicaid

One of the key points of the ACA was its Medicaid expansion. However, when the Supreme Court upheld the ACA in 2012, it ruled that states didn’t have to participate in Medicaid expansion. As a result, some states have “gap” populations, where tens of thousands aren’t covered by the ACA but still can’t get Medicaid.

Trump has promised “insurance for everybody,” and Medicaid expansion is probably a part of that. House Speaker Paul Ryan is a proponent of the use of block grants for Medicaid, and that could change the way Medicaid is administered in some states.

4. Pass Legal Reforms & Reduce the Price of Drugs

Trump’s health care plan champions legal reforms to protect patients and doctors from “unnecessary costs.” He hasn’t offered a lot of information about how to go about that, though.

A more interesting part of that principle is the idea of reducing drug prices. President Trump has been focused on the cost of prescription drugs since his campaign and insists that negotiation can bring down the cost of drugs. If this tactic is adopted, it could help many people on life-saving medications save money.

5. Create a National Insurance Marketplace

One of the sticking points many people have is that, for the most part, you can’t buy insurance across state lines. The ACA allows for multi-state exchanges, but they haven’t been used very much and success has been dubious.

Trump hopes a national marketplace will force insurers to compete more and offer additional choices for consumers, driving down the price.

What Trump’s Health Care Vision Means for Your Wallet

President Trump’s proposed health care policies would likely have an effect on your insurance costs. Here’s what to watch for.

Tax Credits for Coverage

The ACA currently offers tax credits for purchasing insurance through an exchange. Donald Trump’s speech to Congress last night indicates that tax credits for coverage will still be part of the plan.

But for millennials, that could actually mean paying more for coverage, thanks to a re-jiggering of how these tax credits would work.

A draft ACA replacement bill has been circulating, and presumably, the Trump Administration approves (Trump health secretary Tom Price is in favor). In this bill, tax credits are based on age instead of income.

If that policy is passed, older Americans would see more help under a new health care plan and younger Americans would see less. For some millennials getting subsidies under the ACA today, premium costs could go up due to a smaller tax benefit.

Expansion of HSAs

Details about the expansion of Health Savings Accounts haven’t been released, but their use is supported by both Trump and GOP members of Congress. This provision could be a good thing for younger Americans with few health care needs.

With an HSA, you receive a tax deduction for your contribution, and the money grows tax-free as long as you use it for qualified medical expenses. Under the ACA, you need a high-deductible plan to qualify. A high-deductible plan comes with a lower monthly premium, so users can save money each month that way.

If you don’t spend a lot on health care, the expansion of HSAs could be an advantage, depending on how the expansion is accomplished. If contribution limits are raised or the requirement for a high-deductible plan is eliminated, the HSA piece of “repeal and replace” could have a net benefit on your pocketbook.

National Health Insurance Exchange

The theory behind a national health insurance exchange is simple: Buying across state lines would give consumers more choices and cheaper coverage.

However, this might not actually work as intended. A study from Georgetown University looked at a six-state exchange under the ACA and found that it didn’t bring in new options, or even reduce costs.

On a national scale, though, the results might be different. If insurers are forced to compete by offering different plans, it’s possible that costs could decrease. However, state regulation will still be an issue, and no one has addressed how state-level regulation fits into a national health exchange.

Continuous Coverage

In his speech to Congress last night, Trump insisted that the government shouldn’t mandate coverage. But what’s the alternative?

According to the draft ACA replacement plan, Americans would need to have “continuous coverage” for a set period of time in order to take advantage of coverage for pre-existing conditions. In addition, those who don’t maintain continuous coverage would be subject to higher rates if they decide to re-enroll with an insurance plan.

If you don’t maintain coverage, you could see a significant uptick in your premiums as a result.

What Happens If You Receive Insurance Through Work?

One thing Trump didn’t address was the issue of what happens to those who receive insurance through work.

It isn’t clear how tax credits, Medicaid block grants and other items would be paid for, since the latest proposals are mum about the taxes the ACA imposes on those with higher incomes.

Ideas circulating among GOP members of Congress include a provision that caps the tax exclusion on coverage from employers. That means if your employer-sponsored health coverage exceeds the cap, you could pay higher tax costs.

The Bottom Line on Trump’s Health Care Plan

For now, it’s mostly speculation. Trump’s speech set forth principles for an ACA replacement, some of which protect the more popular aspects of Obama’s health plan.

Of course, it’s actually up to Congress to decide how to proceed. President Trump can outline his preferences, but that doesn’t mean Congress will follow his lead.

As with any policy, there will be winners and losers. Whether you end up paying more or less for insurance depends on what happens next in Congress.

Image: BasSlabbers 

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Here’s How Your Student Loans Can Get You a Tax Break

Paying interest is no fun, but if you have student loan debt, you don’t have much choice. Fortunately, the government offers a break. Here's how to get it.

Paying interest is no fun. But if you have student loan debt, you don’t have much choice.

Wouldn’t it be great if the government gave you a break on that student loan interest you pay each year?

Well, here’s some good news: You might be able to deduct a portion of student loan interest from your taxable income — up to $2,500 — thanks to the student loan interest tax deduction. Find out if you qualify for this deduction and learn how to claim it below.

How the Student Loan Interest Tax Deduction Works

The IRS lets you claim the student loan interest tax deduction on Form 1040, Line 33. Because it’s considered an “above the line” deduction (i.e., an adjustment to your income), you don’t have to itemize your taxes in order to claim it.

Keep in mind, this is a deduction and not a credit. That means claiming this deduction will reduce your taxable income by up to $2,500. In terms of real dollars saved, your total tax bill could be reduced by up to $625, depending on your income and how much student loan interest you pay.

Who Qualifies for the Deduction?

There are three qualification criteria you need to meet in order to claim the student loan tax deduction:

  1. Have a Qualified Student Loan: First, you need to have a qualified student loan. The IRS says that the loan must be taken out to pay for qualified education expenses. Not only that, but it can’t be a loan from someone related to you, or provided as part of a qualified employer plan. So, if your grandma offers you a loan for your education, and you pay interest to her on top of making principal payments, you can’t deduct that interest. The same is true if your employer offers student loans as part of a company benefit. Only loans from the federal government or a private lender will qualify.
  2. Be a Qualified Student: Next, the loan must be taken out on behalf of a qualified student in order to deduct the interest. The student can be you, your spouse, or your dependent. So, you can still deduct student loan interest from your income, even if the loan is financing your spouse’s or child’s education and not yours. However, no matter who that student is, they must have been enrolled at least half-time in a program at an eligible educational institution when the loan was taken out. The program should lead to a degree, certificate, or other recognized credential.
  3. Meet Income Requirements: Finally, there is an income requirement. The IRS won’t let you claim the student loan interest deduction if your modified adjusted gross income (MAGI) is at least $160,000 if married filing jointly or $80,000 for other filing statuses.

To see if you qualify and find out how much you might personally save on your taxes, you can use a student loan interest deduction calculator to run the numbers. The IRS also offers a handy tool to determine if you qualify for the deduction. It takes about 10 minutes to complete.

How the Deduction Impacts Your Tax Bill

Realize that a tax deduction reduces your income; it doesn’t mean a dollar-for-dollar reduction in what you pay in taxes (that’s a credit). With a tax deduction, your tax bill is smaller because your taxable income is lower.

In the case of the student loan interest tax deduction, the maximum tax benefit is $625. Your actual tax benefit is determined by your income, filing status, and how much you paid in student loan interest.

Say you file single, your MAGI is $45,000, and you paid $800 in student loan interest. Your income might be reduced by $800, but the actual impact on your taxes is to lower what you pay by $200.

It’s still a reduction in what you owe, and when you combine the student loan interest tax deduction with other deductions and credits, it can make a big difference in your final tax bill (or refund).

How to Claim the Student Loan Interest Tax Deduction

Start by taking a look at how much you paid in interest (not your total student loan payments). That information can be found on Form 1098-E. Each of your student loan servicers should send you a copy. You can find the interest you paid in Box 1.

Add up the amounts from all your forms and enter it on your tax form in the appropriate place. However, you might need to make sure you meet the income requirement.

According to the IRS, your MAGI is basically your adjusted gross income (Line 37 of the Form 1040) after adding back in certain deductions. Some of the deductions you add back in include:

  • Student loan interest
  • One-half of your self-employment tax
  • Tuition and fees deduction
  • IRA contribution deduction
  • Certain investment losses
  • Exclusion for adoption expenses

For example, your adjusted gross income might be $40,000. However, you claimed $3,000 in IRA contributions and $1,000 in student loan interest. Plus, your side gig meant a self-employment tax deduction of $500. That’s $4,500 in deductions. To calculate your MAGI, add that $4,500 back to your adjusted gross income. You end up with a MAGI of $44,500.

As long as your MAGI meets the IRS income requirements, you can still claim the deduction. If all those deductions you’re claiming put your MAGI over the top, you have to erase the deduction from your form.

The student loan interest tax deduction can be a great way to reduce your taxable income and lower your tax bill. It’s best used in conjunction with other tax breaks, so consider consulting a tax professional to find out how to best take advantage of all your options. You can find a quick guide to other common tax deductions and exemptions here.

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Most Borrowers Don’t Think Trump Will Be So Bad for Their Student Loans

Many borrowers actually like an idea about student loan repayment Trump mentioned in a speech during his campaign.

Nearly 40% of student loan borrowers are concerned that Donald Trump’s administration will negatively impact their student loans, according to a new survey from Student Loan Hero. As the country moves into a new era of governance, some graduates are concerned that an already-difficult student debt situation will get worse.

In fact, more than one-fourth (26.6%) of survey respondents admitted they believe a Trump administration will have a “very negative” effect on their student loans. On the other hand, about 40% said they think Trump will have neither a positive nor a negative effect on their student loans, and the remaining respondents (about 20%) said they think he will have a somewhat or very positive effect on their student loans.

These figures come from a poll conducted by Google Consumer Surveys on behalf of Student Loan Hero from Jan. 6 to 9, and the results are based on a nationally representative sample of 1,001 adults with student loans living in the United States.

In the last few years, there’s been quite a lot said about the growing student loan crisis. But what can be done? Student loan borrowers have some idea of policy changes they’d like to see implemented during the Trump administration.

Borrowers Want More Student Loan Forgiveness Options

When asked which student loan changes they would like to see implemented under Trump’s administration, nearly half (44.3%) of respondents chose “federal loan forgiveness after 15 years.” In a speech during his campaign, Trump mentioned something along those lines, proposing a repayment plan in which borrowers pay 12.5% of their income for 15 years, after which any remaining balance would be forgiven. (Whether or not that’s a viable proposal is another matter.)

Currently, student loan borrowers can have their loans forgiven after 20 to 25 years of payments on a federal income-driven repayment plan. There is also a program for federal student loan forgiveness after 10 years in a qualifying public service job (only payments made after Oct. 1, 2007 count). Additionally, borrowers in certain industries can qualify for partial loan forgiveness. However, not everyone qualifies for these forgiveness programs; of those who do, not all will actually have any debt left over by the time the repayment term is up.

It’s not surprising many student loan borrowers expressed interest in a federal loan forgiveness program that discharges student debt after 15 years. According to the survey, 25% of respondents have either stopped making student loan payments or have lowered the amount they put toward repayment in the hope that the government will forgive student loan debt in the future.

Borrowers Also Want Refinancing Options

Student loan borrowers aren’t just asking for forgiveness. Close to one-third of respondents (31.4%) would like to see a program to refinance federal student loans implemented during a Trump administration.

Currently, it’s only possible to refinance through private lenders — the federal government doesn’t offer a refinancing option. The problem is that refinancing federal loans with a private lender means losing access to federal protections such as income-based repayment, deferment, forbearance and some forgiveness programs. Not to mention, borrowers are subject to credit checks and other underwriting criteria that’s at the discretion of each individual lender.

A federal refinancing program could help more borrowers gain access to refinancing options, retain their federal benefits and allow them reduce their interest charges.

How Much Debt Do Student Loan Borrowers Have?

Addressing student loan debt is likely to be on the radar for the incoming administration, especially with nearly $1.4 trillion in student loan debt outstanding.

According to the survey, more than one-third (36.4%) of student loan borrowers have more than $30,000 in debt. Nearly one-fifth (19%) have more than $50,000 in student loan debt. Interestingly, 7.5% of the survey’s respondents aren’t even aware of how much debt they have.

It’s yet to be seen how Trump or Betsy DeVos, his nominee for Secretary of Education, will handle what many consider to be a crisis, but the consensus seems to be that something needs to be done. In response to a request for elaboration on Trump’s student loan repayment proposal, a spokeswoman from his transition team said, “If confirmed, the Secretary designate looks forward to working with the President-elect, the Congress and other stakeholders to address the issues of student debt and repayment.”

No matter who is president, student loan debt can seriously impact your financial situation, including your credit score. (You can see just how much by reviewing the two free credit scores you can get through Credit.com, which are updated every 14 days.) Knowing your options when it comes to student loan repayment and refinancing will be crucial over the next four years and beyond.

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