I’m About to Retire. What Accounts Do I Withdraw From First?

It can vary, but there are a few rules of thumb to consider when it comes to paying taxes on your retirement funds.

Q. I’m confused about how to decide which accounts to take money from when I retire next year. I’m 61. I have $730,000 in my 401K, $129,000 in a Roth, $200,000 in taxable mutual funds and about $50,000 in cash accounts. I will have about $24,000 a year in Social Security but not until age 65.
— Almost there

A. Congratulations on your upcoming retirement.

The good news is that you are permitted to start taking distributions from your 401K without penalties once you reach age 59 1/2. So next year when you retire, you are permitted to take money out of all of these accounts without any tax penalties, said Marnie Aznar, a certified financial planner with Aznar Financial Advisors in Morris Plains, N.J.

She said you should keep in mind that distributions from your 401K will be subject to ordinary income taxes, while distributions from your Roth IRA will not be subject to income taxes upon distribution.

The money that you have accumulated in taxable funds is also available, but if there are embedded capital gains in these holdings, you will incur taxable capital gains upon sale of the funds, Aznar said. If you have any capital loss carry-forwards, you could use them to offset future capital gains on your tax returns.

If your taxable account is generating some interest and dividends that you could have transferred into your checking account automatically each month, Aznar suggests you start with that in terms of covering your basic living expenses.

“The longer that you are able to leave the money within your 401K plan or IRA rollover — if you choose to roll it over — the longer it will remain invested on a tax-deferred basis,” Aznar said. “This means that you can avoid paying taxes for longer which will result in accumulating more funds.”

She said you may want to consider withdrawing just enough from your 401K plan to keep your tax burden as low as possible.

Without knowing more about your situation, Aznar made some assumptions to give a more detailed example.

Let’s assume you file your tax return “married filing jointly” and have no other income starting next year.

If you then hypothetically earned $100 of interest income and $4,000 of dividend income annually and claimed the standard deduction, and if you were to withdraw $30,000 from your 401K you would be subject to a total federal and New Jersey tax bill of less than $1,500 for the year, she said. (Calculations can vary by state; consult a local tax accountant for a better understanding of the taxes you’ll be subject to.)

If you were to withdraw $20,000 from the 401K plan, this would result in avoiding federal taxes completely and paying less than $400 in New Jersey state taxes, she said.

And once you start taking Social Security, your tax situation will change.

“Determine how much you need to withdraw to live on each month and then ideally, pull from the various buckets in the most tax-efficient manner,” she said.

For more on taxes, visit out tax learning center.

Image: Rawpixel

The post I’m About to Retire. What Accounts Do I Withdraw From First? appeared first on Credit.com.

Here’s What You Need to Know About Getting a Mortgage With ‘Paper Losses’

If you're tax returns show a net loss, you may have a tough time getting a mortgage. Here's what you need to know.

You probably already know qualifying for a mortgage requires an acceptable credit score, sufficient assets and stable income. All of these show you can support a mortgage payment, plus other liabilities. But what if you have “paper losses” on your tax returns? The mortgage process can get a little trickier. Here’s what you need to know.

You Have Rental Income Losses

On almost every mortgage loan application this can come back to bite the borrower. This is because rental losses usually represent more expenses going out than there is revenue to cover the property. Lenders use a special Fannie Mae formula, which in most instances makes losses look even worse. This is because the expenses are added back into the mortgage payment, then deducted from it over a 24-month period.

It is important to note that, when purchasing a rental for the first time, some lenders use an exception basis. The exception they are going to use is 75% of the projected market rentals. This is to help offset the mortgage payment as long as you are specifically purchasing a rental property.

You Have a Schedule C

This is a biggie. No one wants to pay an excess amount of taxes, especially self-employed individuals. You may be aware taxation is higher for self-employed individuals. So it goes without saying: Every accountant wants to be a hero by saving you money when helping with your tax returns. They could, however, be doing this at the expense of you refinancing or buying a home.

Writing off all your expenses, or worse, showing negative income means the lender has less income to offset a proposed mortgage payment. Even if you own a home already, have excellent credit and have an impeccable payment history, it does not matter. The income on paper is what lenders look at.

You Have Entity Losses

The following scenario is a common one where borrowers pay themselves a W-2 wage along with a pay stub, at the expense of bleeding the company dry. This will become problematic, because there almost certainly will be lower income figures. The same income figures the borrower is trying to qualify with.

Any negative income being reported on personal or corporate tax returns, will hurt your chances of qualifying for financing. As a result, one of these may be an offset, but they are not limited to the following:

  • Waiting until the following year – Depending on the severity of how much income loss there is, you may need to do a two-in-one. This means showing two years of income in one year. This is to offset the two year averaging lenders use when calculating your income.
  • Changing loan programs – This could be an array of different things, but it may mean going from a conventional mortgage to a FHA mortgage for example.
  • Investigating more – You might need to put more money down to purchase a home than you otherwise thought. You would do this if your income is lower than what your purchase price expectations are.
  • Paying off debt – Depending on your financial scenario, paying off consumer obligations is always a smart and healthy approach, and can improve your overall credit scores, even if it requires some of your cash. (You can check two of your credit scores free on Credit.com.)

What should you do if you know you want to qualify for financing and you currently have tax returns that contain losses? First and foremost, consult with your tax professional. Learn what your options are. Once armed with those options, talk to a lender skilled enough to help you understand how much financial power you may have in the marketplace.

Image: anyaberkut

The post Here’s What You Need to Know About Getting a Mortgage With ‘Paper Losses’ appeared first on Credit.com.

Freelancers: Here’s What You Need to Know About Getting a Mortgage

When it comes to mortgage loans, there’s a special exception for freelancers, business owners, and even Realtors.

When my husband (then fiancé) and I began preparing to purchase our first home, I was a burden.

I know what you’re thinking — my writing career as a freelancer simply must not have been generating enough money to allow me to contribute, and I needed to ride on the coattails of my fiancé’s full-time job and steady paycheck to get the home of my dreams.

Given the reputation of a freelancer’s income, I don’t blame you. And having started on this new career just months before house hunting, I actually was a little strapped for cash.

However, it wasn’t my uncertain income that excluded me from the mortgage-qualifying round. Despite my limited pennies, I was more than willing to be an equal partner in the house-buying process.

The bank? They had different ideas — ideas I didn’t even know existed until I was in the thick of it all. They told me my income would not be considered when pre-approving us for a mortgage loan amount. Instead, the loan would be based on my fiancé’s income alone.

This came as a surprise, to say the least. So I’ve made it my mission to spread the word to others who might find themselves in the same boat. Let’s break this down, shall we?

What Freelancers Need to Know

When it comes to mortgage loans, there’s a special exception for freelancers, business owners and even real estate agents — basically, it’s a rule for people who are self-employed with a sporadic income.

So, what exactly is this rule? Well, the bank told me I needed two full years of freelancing income history for them to consider for our loan amount. (Shopping for home loans? Be sure to check your credit first. You can view two of your free credit scores, with updates every two weeks, on Credit.com.)

Be warned: These specific restrictions might vary from bank to bank, so you’ll want to talk to your own lender to determine what you need.

The general rule is that you’ll need to share 24 months’ worth of income history in the form of your personal and business tax returns. They average those two years to get a general idea of how much you make during a typical year, which they can then use to determine what size loan you could realistically handle. (You can see how much house you can afford here.)

Since I had only been freelancing for a handful of months, I had next-to-no information to share with them. My business was just getting off the ground — I barely had two months of income to report, let alone two full years.

So we were left with a choice: Either we could wait for two years until I had built up a solid enough income history as a freelancer for them to consider, or we could qualify for a loan using just my husband’s income.

The latter option was a little demoralizing. I was making money, so why couldn’t I be an active part of the purchasing process? Why was I being punished by having to take a backseat and watch my fiancé sign his name on that pile of paperwork? Starting my own business as a freelancer was a scary enough leap without being made to feel like a lesser half of our partnership.

However, it didn’t take me long to begin to understand where the bank was coming from. It’s a risk to lend money to a freelancer — someone who might make $7,000 one month and $700 the next. But just because I could understand it, didn’t mean I liked it.

So my fiancé and I worked out an arrangement so I could still feel like I was involved in our home purchase. I wrote him a check to contribute to our down payment, and we continued to shuffle money around between the two of us to cover the mortgage and other living expenses until we were married and shared joint accounts.

It was a bit of a roundabout way to involve me in the process, and it still had its frustrating moments.

As a freelancer, I still work full time — just not in the way a bank can calculate. But in the end, it was actually a good thing. The fact that we received our loan amount after reporting only my husband’s income means we took on a loan and bought a house priced well within our budget.

While the process was far from painless, knowing we’ll never be house poor? Well, that’s priceless.

Image: Peopleimages

The post Freelancers: Here’s What You Need to Know About Getting a Mortgage appeared first on Credit.com.

This Simple Trick Can Keep Mortgage Paperwork From Becoming a Huge Hassle

Securing a mortgage requires a laundry list of paperwork. But there’s a way to simplify it.

Every year for your tax returns, you gather together paperwork such as receipts, explanations, paystubs and W-2s. Seventy percent of this information contains the same things you’ll need for getting a mortgage loan. If you do your taxes on time in April and save your documents in a secure, easily accessible location, you can use it to to support your application for a home loan later in the year.

In an encrypted thumb drive, round up all your “mortgage documentation.” (Just remember the password for the thumb drive and, of course, where you ultimately choose to store it.) Within the drive, make subfolders that have the following titles:

  • Tax returns: You can include all pages and schedules of personal returns and corporate returns. Mortgage tip: Make a PDF of this information for future use and store safely.
  • W-2s: same concept, but you’ll need the most recent two years.
  • Pay stubs: every time you get paid, download the pay-stub in PDF format onto the thumb drive and drag and drop it into the folder. It shouldn’t take too long and can save you a ton of time in the future.
  • Bank statements: every month when you pay bills simply download your bank statements in PDF format and similarly add them into the appropriately titled folder.

Be sure to delete any sensitive information that is not properly protected on your computer to minimize your risk should you accidentally download malware onto your computer or otherwise get hacked.

Doing the above things does create a bit more work on an ongoing basis, but it insures you are prepared. These documents can also help your applications for other types of credit in the future, including:

  • car loans
  • student loans
  • personal loans
  • home equity lines of credit
  • credit cards
  • any credit offers

Documentation planning will make the process of obtaining credit less of a scramble, keeping supporting documentation literally at your thumb tips. Save yourself from the need to go “digging.” If applicable, also have this information handy:

  • Your divorce decree: have the divorce decree including all pages, all schedules and the schedule of creditors in a saved folder.
  • Prior foreclosure documents: have the trustee’s sale date deed.
  • Short sale documents: have the final settlement statement from that transaction.
  • Alimony or child support paperwork: have the agreement paperwork.
  • Information on tax debt: have state and/or federal payment plan on file.

Requests for the documentation referenced in this article are consistent with today’s mortgage lending world. Be smart, be prepared and make sure you have the documentation ready before the lender asks for it to minimize hitting any snags.

Remember, too, your credit score will also play into your ability to qualify for an affordable mortgage. You can keep track of how your credit by viewing your free credit report summary, along with two free credit scores, updated every 14 days, on Credit.com.

Image: monkeybusinessimages

The post This Simple Trick Can Keep Mortgage Paperwork From Becoming a Huge Hassle appeared first on Credit.com.

Remember: Keep Your Tax Returns If You’re Looking to Buy a Home

If you were planning to buy a home or refinance one you already own, you can expect to encounter a lot of paperwork. But here’s one thing you probably didn’t know: Tax returns aren’t always required.

If you are a W-2 wage earner, there is a smaller chance you’ll need to provide tax returns than if you’re self-employed. If you’re self-employed, the only way a lender can determine your income is by examining your tax returns. As a self-employed worker, these documents show how much you took home versus your net income. There are some situations where you can get away with using a year’s worth of tax returns, such as when you transition from being full-time employee at a company to being self-employed.

Automated Underwriting Findings

Mortgage lenders will ask for two years of tax returns, plus two years of W-2s and pay stubs from the last 30 days. Every mortgage in America sold on the secondary market is run through automated underwriting, software systems that crunch data and let lenders know your risk in terms of repaying the loan.

If you are a W-2 wage earner and the automated underwriting findings do not require tax returns, you may not need to provide returns at all in order to close on a home.

To be clear, we are discussing the average W-2 wage earner. Any of the following could trigger needing two years of tax returns despite your employee status:

  • Rental income
  • Social Security income
  • Pension income
  • Schedule C income beyond your normal W-2 job
  • Partnership in a business or another entity

Other Things to Keep in Mind

When you apply for a loan, it’s generally a good idea to provide two years of tax returns, two years of W-2s and the 30-day pay stubs all lenders require. However, there is a saying in mortgage lending that applicants should only provide “what is needed.” Providing only what’s asked for can go a long way, as there are fewer documents to scrutinize. That said, automated underwriting dictates what documentation you must provide to obtain financing.

Some banks also have additional requirements, so even if your loan does not require tax returns, their individual banking policies might. Such requirements are due to the bank’s relationship with Fannie Mae and Freddie Mac, or its particular appetite for risk. A good rule of thumb is to provide the bare bones requirements so there are no questions as to whether you qualify.

The key is to work with a mortgage lender who has a common sense approach to financing rather than one who promises ultra-low rates but is so risk-adverse that you are continuously asked to furnish more paperwork and your loan never ends up closing escrow.

Remember, a good credit score can help you secure an affordable mortgage. As such, it’s a good idea to see where you stand before you start applying. You can check your credit scores for free each month on Credit.com.

More on Mortgages & Homebuying:

Image: demaerre

The post Remember: Keep Your Tax Returns If You’re Looking to Buy a Home appeared first on Credit.com.

The 12 Tax Forms You Might Have Forgotten About


Image: Piotr Marcinski

The post The 12 Tax Forms You Might Have Forgotten About appeared first on Credit.com.

7 Birthdays That Can Change Your Tax Returns


The Federal income tax code has several rules that are triggered by your age. And, while birthdays are fun and simple, these tax rules can be extremely complicated. It is important to know how they apply to you.

1. Age 19: Kiddie Tax

At age 19 (age 24, if you’re a full-time student), the “Kiddie Tax” provision ends. The Kiddie Tax is designed to prohibit a child’s unearned income — typically investments — to be taxed at a their (presumably) lower income tax rate and instead taxes them at the parents’ rate. For 2016, the first $1,050 unearned income is tax-free to the child. The next $1,050 is taxed at the child’s rate and any unearned income over $2,100 is taxed at the parents’ rate.

2. Age 50: Catch-Up Contributions

Anyone who is eligible to make contributions to a qualified retirement plan and has reached age 50 during the calendar year can add an additional amount called a “catch-up contribution” (if your employer allows it). This terminology is a bit confusing since there is no requirement to be “behind” in your plan contributions in order to be eligible to make the additional elective deferral.

While the limits are indexed annually, the 2016 limits were unchanged from 2015 and are as follows: 401K, 403B, SARSEP and 457B plans – $6,000; SIMPLE IRA and SIMPLE 401K accounts – $3,000; traditional or Roth IRAs – $1,000. There is no catch-up allowed for an SEP IRA.

While contributions to employer-sponsored plans are required to be made by Dec. 31, you have until your filing deadline for catch-up contributions to Traditional or Roth IRAs.

3. Age 55: Waiver of Penalties

A similar “catch-up” provision is allowed for Health Savings Accounts (HSAs) in the amount of $1,000. However, you must be age 55 to take advantage of this one.

As a general rule, distributions from a qualified retirement account prior to age 59½ are subject to a 10% penalty in additional to ordinary income tax. However, this penalty is waived if you are at least age 55 (age 50 for state public safety employees) in the year that you retire, quit or are fired from your employer. Since this waiver only applies to your company retirement plan, and not to IRAs, you should wait until you are at least 59½ to roll the funds over to an IRA if you want to take these early distributions.

4. Age 59½: Retirement Access

Once you reach age 59½ the 10% penalty on retirement plan distributions disappears. You can take as much or as little from your retirement plan as you want and just pay ordinary income tax. (Amounts allocated to after-tax contributions are never taxed when distributed.)

5. Age 62: Early Social Security Starts

You have been paying Social Security taxes for years and now it is time to claim your benefits. Age 62 is the earliest you can claim Social Security Retirement benefits. Keep in mind, however, that early benefits equals lower benefits. Anyone retiring in 2016 must be at least age 66 years old to receive full retirement benefits, and claiming at age 62 would permanently reduce those benefits by 25%.

How does this impact your tax return? Remember, Social Security Retirement benefits could be subject to taxation. To determine if they are, add ½ of your Social Security benefit to all of your other income, including tax-exempt interest. If the total is greater than $25,000 (for single and head of household), $32,000 (for married filing jointly), or $0 (for married filing separately) then the benefits will be partially taxable.

6. Age 70: Social Security Deferral Ends

If you decide to defer Social Security Benefits beyond your normal retirement age, the delayed benefits will increase by as much as 8% per year. However, these increases stop once you reach age 70 when you must start receiving benefits.

7. Age 70½: Required Minimum Distributions

You cannot defer retirement account distributions forever. Generally, you have to start taking Required Minimum Distributions (RMDs) from your retirement plans once you reach age 70½. (Roth IRAs, however, do not require lifetime withdrawals.) The distribution amounts are based upon tables listed in IRS Publication 590-B. While you can take your first withdrawal in the year you turn 70½, the latest you can take it is April 1 of the following year. If you choose to wait until the following year, you will have to take both the first and the second distributions in that same year.

If you are still working, you can delay taking Required Minimum Distributions in your company’s 401K or 403B plan (and all other defined contribution plans) until you retire. This exception does not apply to any IRAs, SEP IRAs or SIMPLE IRAs. If your plan permits it, you could roll your IRA into the company 401K and then defer RMDs on all of your retirement assets. The exception also does not apply to anyone who owns at least 5% of the company that sponsors the qualified retirement plan.

Before acting you should seek out professional guidance from a Certified Public Account or another qualified tax preparer. Here are seven birthdays that can wind up changing your tax returns.

More on Income Tax:

Image: Image Source Pink

The post 7 Birthdays That Can Change Your Tax Returns appeared first on Credit.com.

Are You Missing Out on This Tax Break?


Are you or someone you know overlooking one of Uncle Sam’s most generous tax breaks? The Saver’s Credit allows low- to moderate-income workers who are saving for retirement to reduce their federal tax bill by as much as $1,000 ($2,000 for married couples filing jointly). But just 25% of workers with annual household incomes of less than $50,000 are aware of the credit, according to a new Transamerica Retirement Survey.

“Unfortunately, many eligible workers may be missing out on the Saver’s Credit simply because they don’t know that it exists,” Catherine Collinson, president of the nonprofit Transamerica Center for Retirement Studies said in a news release on the survey.

The Saver’s Credit — also called the Retirement Savings Contribution Credit — may be applied to the first $2,000 in voluntary contributions an eligible worker makes to an IRA or an employer-sponsored retirement plan such as a 401(k) or 403(b). It’s easy to see why taxpayers might miss this credit. Because contributions in employer-sponsored retirement plans and IRAs grow tax free, workers often confuse the two benefits or figure the government wouldn’t offer two tax benefits for the same savings. But the credit is an important incentive for these workers to save for retirement, according to Collinson.

Here’s who’s eligible for the Saver’s Credit for the 2015 tax year.

  • Single filers with adjusted gross income (AGI) of up to $30,500
  • Head of households with AGI up to $45,750
  • Married couples filing a joint return with AGI up to $61,000

Eligible taxpayers must file a 1040, 1040A or 1040NR. The credit is not allowed on the 1040EZ.

However, whether or not you are eligible for the Saver’s Credit, contributing to your employer-sponsored retirement account or a traditional IRA can be one of the best ways to maximize your tax refund. The reason? Your contributions are made with pre-tax dollars, which helps lower your taxable income – and build savings for the future. Knowing the basics of common tax exemptions and deductions can also help. You can find more information on the Saver’s Credit on the Transamerica Center for Retirement Studies website or on www.IRS.gov.

Remember, filing your taxes early can minimize the odds of falling victim to taxpayer identity theft. And, if you are a victim of tax refund fraud and believe your Social Security number was compromised, you should keep an eye on your credit for signs of other types of identity theft. You can do so by pulling your credit reports for free each year at AnnualCreditReport.com and viewing your credit scores for free each month on Credit.com.

More Money-Saving Reads:

Image: Wavebreakmedia Ltd

The post Are You Missing Out on This Tax Break? appeared first on Credit.com.

9 Tax Nightmares


Image: Purestock

The post 9 Tax Nightmares appeared first on Credit.com.