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Posted on February 28, 2021

HSA for Retirement: Rules, Benefits, and Getting Started

If you have a high-deductible health plan, chances are you’re eligible to save money for medical expenses in a tax-free health savings account (HSA). You might already know that, and perhaps you’re currently contributing pre-tax dollars to your HSA. But did you know that HSAs can be used for more than just out-of-pocket medical expenses?

An HSA can be a useful vehicle for boosting your retirement savings, especially if you’re young, healthy, and rarely visit the doctor. HSAs provide an additional means for accumulating tax-advantaged savings for retirement, beyond traditional retirement plans like an IRA and a 401(k) plan.

What Is an HSA?

A Health Savings Account is a type of tax-advantaged savings account for individuals with a high-deductible health care plan—defined by the IRS as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.

Anyone who fits the criteria is eligible to open an HSA and save pre-tax dollars: up to $3,550 a year for individuals and up to $7,100 for families for the 2020 tax year. If you’re 55 or older at the end of the tax year, you can contribute an additional $1,000.

HSA Bank calculator

An employer can also make a matching contribution into your HSA, though total employer and employee contributions can’t exceed the annual limits. You can then withdraw funds in your HSA to pay for qualified medical and dental health care expenses, including copays for office visits, diagnostic tests, supplies and equipment, over-the-counter medications and menstrual care products as of 2019. Unlike flexible spending accounts (FSA), the money in an HSA doesn’t have to be used by the end of the year. Any money in that account remains yours to access, year after year.

Before age 65, there is a 20% penalty for withdrawing funds from an HSA for non-medical expenses, on top of ordinary income tax. After age 65, HSA holders can also make non-medical withdrawals on their account, though ordinary income tax applies.

3 Reasons to Use an HSA for Retirement

Though they aren’t specifically designed to be used in retirement planning, it’s possible to use an HSA for retirement as a supplement to other income or assets. Because you can leave the money you contribute in your account until you need it for qualified medical expenses, the funds could be used for long-term care, for example. Or if you remain healthy, you could tap your HSA in retirement to pay for everyday living expenses.

There are several advantages to including an HSA alongside a 401(k), Individual Retirement Account, and other retirement savings vehicles. An HSA can yield a triple tax benefit since contributions are tax-deductible, they grow tax-deferred, and once you withdraw those funds for qualified medical expenses, distributions are tax-free. If you’re focused on minimizing tax liability as much as possible prior to and during retirement, an HSA can help with that.

Using an HSA for retirement could make sense if you’ve maxed out contributions to other retirement plans and you’re also investing money in a taxable brokerage account. An HSA can help create a well-rounded, diversified portfolio for building wealth over the long term. Here’s a closer look at the top three reasons to consider using HSA for retirement.

1. It Will Lower Your Taxable Income

You may not be able to make contributions to an HSA in retirement, but you can score a tax break by doing so during your working years. The money an individual contributes to an HSA is deposited pre-tax, ultimately lowering their taxable income. Furthermore, any employer contributions to an HSA are also excluded from a person’s gross income.
The money you’ve deposited in an HSA earns interest and contributions are withdrawn tax-free, provided the funds are used for qualified medical expenses. In comparison, with a Roth IRA or 401(k), account holders are taxed either when they contribute or when they take a distribution. Using HSA for retirement could help you balance out your tax liability.

2. You Can Save Extra Money for Health Care After Retirement

Unlike Flexible Spending Accounts that allow individuals to save pre-tax money for health care costs but require them to use it the same calendar year, there is no “use it or lose it” rule with an HSA. If you don’t use the money in your HSA, the funds will be available the following year. There is no time limit on spending the money.

Because the money is allowed to accumulate, using an HSA for retirement can be a good way to stockpile money to pay for health care, nursing care, and long-term costs (all of which are qualified expenses) if needed. While Americans can enroll in Medicare starting at age 65, most long-term chronic health care needs and services aren’t covered under Medicare. Having an HSA to tap into during retirement can be a good way to pay for those unexpected out-of-pocket medical expenses.

3. You Can Boost Your Retirement Savings

Beyond paying for medical expenses, HSAs can be used to save for retirement. Unlike a Roth IRA, there are no income limits on saving money in an HSA. Some plans even allow you to invest your HSA savings, much like you would invest in a 401(k). This can further augment your retirement savings because any interest, dividends, or capital gains you earn from an HSA are nontaxable. Plus, in retirement, there are no required minimum distributions from an HSA account—you can withdraw money only when you want or need to.

Some specialists warn that saving for retirement with an HSA really only works if you’re currently young and healthy, rarely have to pay health care costs, or can easily pay for them out of your own pocket.

But if that is the case, come retirement (after age 65) you’ll be able to use HSA savings to pay for both medical and non-medical expenses. While funds withdrawn to cover medical fees won’t be taxed, you can expect to pay ordinary income tax on non-medical withdrawals.

HSA Contribution Limits

As you are planning contributing to an HSA—whether for immediate and short-term medical expenses, or to help supplement retirement savings—it’s important to take note of HSA contribution limits. If your employer makes a contribution to your account on your behalf, your total contributions for the year can’t exceed the annual contribution limit.

2020 HSA Contribution Limits:

•  $3,550 for individual coverage
•  $7,100 for family coverage
•  Individuals over age 50 can contribute an additional $1,000 over the annual limit

2021 HSA Contribution Limits

•  $3,600 for individual coverage
•  $7,200 for family coverage
•  Individuals over age 50 can contribute an additional $1,000 over the annual limit

As with an IRA, you have until the tax filing deadline to make a contribution for the current tax year. So if you wanted to contribute money to an HSA for 2020, you’d have until April 15, 2021 to do so.

Another caveat: Once you enroll in or become eligible for Medicare Part A benefits, you can no longer contribute money to an HSA.

How to Invest Your HSA for Retirement

An HSA is more than just a savings account. It’s also an opportunity to invest your contributions in the market to grow them over time. Similar to a 401(k) or IRA, it’s important to invest your HSA assets in a way that reflects your goals and risk tolerance.

It’s also helpful to consider the other ways you’re investing money to make sure you’re keeping your portfolio diversified. Diversification is important for managing risk. From an investment perspective, an HSA is just one part of the puzzle and they all need to fit together so you can make your overall financial plan work.

Using an HSA for Retirement FAQs

These are some common questions you might have if you’re considering using your HSA to help save for retirement.

Can HSA Be Used for Retirement?

HSAs are not specifically designed to be a retirement planning vehicle, but you can use an HSA for retirement, since the money accumulates in your account until you withdraw it tax-free for qualified medical expenses. You could also use your HSA funds to pay for other retirement expenses after age 65—you’ll just have to pay income tax on those withdrawals.

What Happens to an HSA When You Retire?

An HSA doesn’t go away when you retire; instead, the money remains available to you until you need to use it. As long as withdrawals pay for qualified medical expenses, you’ll pay no taxes or penalties on the withdrawals. And your invested contributions can continue to grow as long as they remain in the account.

One advantage of using an HSA for retirement versus an IRA or 401(k) is that there are no required minimum distributions. In other words, you won’t be penalized for leaving money in your HSA. Though there is a 20% penalty for using the money for non-medical expenses before age 65.

How Much Should I Have in HSA at Retirement?

The answer to this question ultimately depends on how much you expect to spend on healthcare in retirement, how much you contribute each year, and how many years you have to contribute money to your plan. Say, for example, that you’re 35 years old and making contributions to an HSA for retirement for the first time. You plan to make the full $3,550 contribution allowed for individual coverage for the next 30 years.

Assuming a 5% rate of return and $250 in medical spending each year, you’d have just over $230,000 saved in your HSA at age 65. Using an HSA Bank calculator to play around with the numbers can give you a better idea of how much you could have in your HSA for retirement if you’re saving consistently.

When Can I Use My HSA Funds?

Technically, your HSA funds are available to you at any time. So if you have to pick up a prescription or make an unscheduled visit to the doctor, you could tap into your HSA to pay for any out of pocket costs not covered by insurance. But if you’re interested in using an HSA in retirement, it’s better to leave the money alone as much as possible so that it has more opportunity to grow over time.

The Takeaway

A health savings account can be a valuable tool in your current budget, to help pay for out-of-pocket medical costs, tax-free. But it can also be used to accumulate savings (and interest) tax-free, to be used on medical and non-medical expenses in retirement.

It’s never too early—or too late—to start saving for retirement, and when you open an investment account with SoFi Invest®, you can begin investing with as little as $1. Or check out other retirement accounts, like a traditional or Roth IRA.

Ready to take the next steps in saving for retirement? Open a SoFi Invest account today.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Posted on February 28, 2021

How to Create a Financial Plan in 11 Steps

Structure is the key to growth. Without a solid foundation — and a road map for the future — it’s easy to spin your wheels and float through life without making any headway. Good planning allows you to prioritize your time and measure the progress you’ve made.

That’s especially true for your finances. A financial plan is a document that helps you track your monetary goals to measure your progress towards financial literacy. A good plan allows you to grow and improve your standing to focus on achieving your goals. As long as your plan is solid, your money can do the work for you.

Thankfully, a sound financial plan doesn’t have to be complicated. Here’s a step-by-step guide on how to create a financial plan. 

What Is a Financial Plan?

Financial planning is a tangible way to organize your financial situation and goals by making a roadmap to achieve them. When determining where to start, you should consider what you currently possess, your long-term goals, and what opportunity costs you’re willing to take on to meet your money goals.

Financial planning is a great strategy for everyone — whether you’re a budding millionaire or still in college, creating a plan now can help you get ahead in the long run. If you want to make a roadmap to a successful future, here’s how to create a financial plan in 11 steps. 

1. Evaluate Where You Stand

Building your financial plan is similar to creating a fitness program. If you don’t have exact steps to reach your goals, you could end up doing random exercises without making progress. To create a successful plan, you first need to understand where you’re starting so you can candidly address any weak points and create specific goals. 

Determine Your Net Worth

One way to figure out your financial status is to determine your net worth. To do this, subtract your liabilities (what you owe) from your assets (what you own). Assets include things like the money in your accounts and your home and car equity, while liabilities can include any debt, loans, or mortgages. Here’s how to calculate your net worth using your assets and liabilities.

Determine your net worth by subtracting your liabilities from your assets.

Your ratio of assets to liabilities may change over time — especially if you pay off debt and put money into savings accounts. Generally, a positive net worth (your assets being greater than your liabilities) is a monetary health signal. You should regularly keep track of your net worth to monitor the trajectory of your financial plan.

Track Your Spending

Another way to evaluate your financial planning process is by measuring your cash flow, or how much you spend compared to how much you earn. Net worth is a great way to understand where you stand financially, but measuring cash flow is how you might ensure you’re heading in the right direction.

Negative cash flow means that you’re spending more than you make, leading to things like credit card debt and bankruptcy. Conversely, positive cash flow means you’re earning more than you’re spending — which is an excellent step towards achieving your money goals. 

Now that you have an idea of your net worth and cash flow, it’s time to set your financial goals. 

2. Set SMART Financial Goals

By setting SMART financial goals (specific, measurable, achievable, relevant, and time-bound), you can put your money to work towards your future. Think about what you ultimately want to do with your money — do you want to pay off loans? What about buying a rental property? Or are you aiming to retire before 50?

Start by putting together a list of your goals and dreams, from running a doggy daycare to living in Paris. Even if it feels outrageous, your financial plans should help you work towards your long-term goals.

SMART goals help you break down your more extensive financial planning process into actionable pieces. Remember that dream to move to Paris? Using SMART goals, you may make your dream to live on the Seine a reality. Here’s how to get started creating your SMART goals:

SMART goals are specific, measurable, achievable, relevant, and time-bound.

Setting concrete goals may keep you motivated and accountable, so you spend less money and stick to your budget. Reminding yourself of your monetary goals may help you make smarter short-term decisions to invest in your long-term goals. 

It’s important to understand that your goals aren’t static. When your life goals change, your financial plans should follow suit.

3. Update Your Budget

Creating a budget may help you determine how to create a financial plan and achieve your long-term monetary goals. When you create a budget and stick to it, you can understand what areas you might afford to spend and where you should be saving. 

An excellent method of budgeting is the 50/30/20 rule, popularized by Senator Elizabeth Warren. To use this rule, you divide your after-tax income into three categories: 

  • Essentials (50 percent)
  • Wants (30 percent)
  • Savings (20 percent)

Pie graph shows how you can break down your budget with the 50/30/20 rule.

The 50/30/20 rule is a great and simple way to achieve your financial goals. With this rule, you can incorporate your goals into your budget to stay on track for monetary success. 

No matter what financial goal you’re working towards, it’s essential to have an updated budget and plan to achieve it. For example, if you’re planning for a wedding, you might eat out less to reduce your grocery budget each month.

What to Include in Your Budget

If you’ve ever tried to put together a budget, you’ve likely considered the basics like rent, loans, and groceries. But what other expenses should you consider? Over time, those daily lattes may start to add up — which is why it’s crucial to think about the many different costs you could incur during the month. When updating your budget, here are some of the most common items to include:

  • Rent
  • Groceries
  • Dining out
  • Household maintenance
  • Emergency fund
  • Subscriptions and memberships
  • Travel and transportation
  • Prescriptions
  • Bank account fees
  • Car registration or lease
  • Pet costs
  • Entertainment
  • Clothing
  • Personal care
  • Charity

So you know what you need to include in your budget. Now what? Check out our budgeting tips to get smart about creating your budget in line with your financial plan. If you’re ready to get the ball rolling on your future, try using a spreadsheet, a piece of paper, or a budgeting app to create your financial plan today. 

4. Save for an Emergency

Did you know that four in 10 adults wouldn’t be able to cover an unexpected $400 expense? With so many people living paycheck to paycheck without any savings, unexpected expenses might seriously throw off someone’s life if they aren’t prepared for the emergency. 

It’s important to save money during the good times to account for the bad ones. This rings especially true these days, where so many people are facing unexpected monetary challenges. Whether you’re just starting on your path to financial literacy or have been saving for years, it’s good practice to review your emergency finances to ensure they would adequately cover your current needs. 

You already know you should be storing away money in case something goes wrong. But did you know that you should be saving for both a rainy day and emergency fund? It’s important to have multiple backup funds to hold you over in case of an unexpected crisis. 

5. Pay Down Your Debt

It can be frustrating to allocate your hard-earned money towards savings and paying off debt, but prioritizing these payments can set you up for success in the long run. With two significant methods of paying off debt, it’s essential to understand the difference between them so you can make the smartest decisions for your financial future. 

A chart shows the differences between debt snowball and debt avalanche repayment. Debt snowballs start with the smallest, while the avalanche method targets the highest interest loans.

No matter the debt repayment option you choose, the key to successfully paying down debt is to be disciplined with your budget. Skipping even one or two months of debt repayments may throw a wrench in your financial plans, so it’s essential to create a realistic budget that you can stick to. 

6. Organize Your Investments

Investing may seem like a difficult topic to navigate, but you can put your money to work and passively grow your wealth when you understand the basics. To start investing, you should first figure out the initial amount you want to deposit. No matter if you invest $50 or $5,000, putting your money into investments now is a great way to plan for financial success later on. 

When deciding how to create a financial plan, you should consider budgeting a set amount each month to go directly into your investment portfolio — this will be your contribution amount. Over time, those small bits of money may begin to grow into increasingly larger sums. However, it’s important to note that investing is a long game. If you want to see serious results, you’re going to have to wait for at least five or more years. 

Ready to get started on your path towards long-term financial success? Check out our investment calculator to create goals, forecast metrics, and find opportunities to grow your wealth even further. 

7. Prepare for Retirement

When thinking about how to create a financial plan, it’s crucial to consider your goals far in the future. Although retirement may feel a world away, planning for it now is the difference between a prosperous retirement income and just scraping by. 

The earlier you can start saving for retirement, the better. If you start saving for retirement in your 20s, you’ll have 30+ years of consistent contributions to your funds by the time you retire. Generally, the older you are, the more you should try to contribute to your retirement fund. However, a good rule of thumb is to save around 10–15 percent of your post-tax income annually in a retirement savings account.

Retirement Plan Types

There are several types of retirement savings, the most common being an IRA, a Roth IRA, and a 401(k):

  • IRA: An IRA is an individual retirement account that you personally open and fund with no tie to an employer. The money you put into this type of retirement account is tax-deductible. It’s important to note that this is tax-deferred, meaning you will be taxed at the time of withdrawal.
  • Roth IRA: A Roth IRA is also an individual retirement account opened and funded by you. However, with a Roth IRA, you are taxed on the money you put in now — meaning that you won’t be taxed at the time of withdrawal.
  • 401(k): A 401(k) is a retirement account offered by a company to its employees. Depending on your employer, with a 401(k), you can choose to make pre-tax or post-tax (Roth 401(k)) contributions. 

A chart shows the difference between IRA, Roth IRA, and 401K retirement options.

8. Start Your Estate Planning

Thinking about estate planning isn’t fun — but it is important. When figuring out how to create a financial plan, it’s crucial to start estate planning to outline what happens to your assets when you’re gone. 

To create an estate plan, you should list your assets, write your will, and determine who will have access to the information. Estate taxes can run up to a steep 40 percent, so having a plan for how to set up your estate may ease the financial burden of your passing on your loved ones. 

Using a Lawyer for Estate Planning

Using a lawyer for estate planning can solidify financial plans that you don’t want to leave to chance. By clearly outlining your estate plan, you can protect against potential legal battles or missteps that could occur when sorting out your estate. If you plan to use a lawyer for estate planning, here’s what you need to know:

  • Find an estate planning specialist: Just like doctors, lawyers specialize in all different fields. You wouldn’t expect a dermatologist to be performing knee surgery, so why would you expect a lawyer with a different specialty to create your estate plan?
  • Clarify legal fees: Estate planning fees may vary dramatically depending on the lawyer and your specific needs. Some lawyers charge based on the complexity of the plan; others charge a flat or hourly fee. There is no right or wrong with estate planning fees, but you should have an upfront conversation with your lawyer to determine which method would work best for you.
  • Find a lawyer you trust: Estate planning is a very personal matter, so you should find a lawyer with whom you feel comfortable sharing personal matters. 

9. Insure Your Assets

As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Although insurance may not be as exciting as investing, it’s just as important. 

Insuring your assets is more of a defensive financial move than an offensive one. When determining how to create a financial plan, you want to have insurance to protect yourself from any unforeseen difficulties that could hinder your success. 

Types of Insurance

There are several types of insurance you might get to protect your assets. Here are some of the most important ones to get when planning for your financial future. 

  • Life insurance: Life insurance goes hand in hand with estate planning to provide your beneficiaries with the necessary funds after your passing.
  • Homeowners insurance: As a homeowner, it’s crucial to protect your home against disasters or crime. Many people’s homes are the most valuable asset they own, so it makes sense to pay a premium to ensure it is protected.
  • Health insurance: Health insurance is protection for your most important asset: Your life. Health insurance covers your medical expenses for you to get the care you need. 
  • Auto insurance: Auto insurance protects you from costs incurred due to theft or damage to your car.
  • Disability insurance: Disability insurance is a reimbursement of lost income due to an injury or illness that prevented you from working. 

10. Plan for Taxes

Taxes can be a drag, but understanding how they work can make all the difference for your long-term financial goals. While taxes are a given, you might be able to reduce the burden by being efficient with your tax planning. When planning for taxes, it’s important to consider:

  • How to reduce your taxable income: You can capitalize on tax savings investment options like a 401(k) or 403(b) to help you save money by reducing your taxable income (while putting more money away for your future). 
  • How to itemize your deductions: Tax deductions are a way to lower taxable income as a full- or part-time self-employed taxpayer. You can deduct incurred expenses from doing business to reduce your taxable income. 

11. Review Your Plans Regularly

Figuring out how to create a financial plan isn’t a one-time thing. Your goals (and your financial standing) aren’t stagnant, so your plan shouldn’t be either. It’s essential to reevaluate your plan periodically and adjust your goals to continue setting yourself up for success. 

As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young 20-something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mid-30s who has an established career.

Staying updated with your financial plan also ensures that you hold yourself accountable to your goals. Over time, it may become easy to skip one payment here or there, but having concrete metrics might give you the push you need for achieving a future of financial literacy. 

After you figure out how to create a monetary plan, it’s good practice to review it around once a year. However, this is just a baseline metric, so checking it more often may be necessary if a significant life event occurs. 

It’s always a good idea to reevaluate your financial plan if you get married, have kids, or quit your job. Every few months or so, take some time to look at your progress and assess problem areas. Take the time to celebrate milestones — it may help motivate you going forward.

Ask for feedback on your financial plan from people who know you. Your best friend might point out some things you’d forgotten about, like your desire to get a dog or live in a downtown loft. You can also run it by a professional, who can provide some objective insight and professional wisdom on how to create a financial plan.

It’s important to remember that the journey to financial success is a personal one, and should be taken at your own pace. However, the earlier you get started, the more prepared you may be for a strong financial future. Download Mint to get started taking control of your finances today.

Sources: CNBC | Federal Reserve | IRS | IRS

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Posted on February 28, 2021

The 9 Best Types of Retirement Accounts

Seniors happily comparing retirement plans on a laptop
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This story originally appeared on NewRetirement.

Saving for retirement is not a one-size-fits-all proposition. Whether you use an IRA, a 401(k), one of the many other options or a combination of several plans, the best retirement plan for you depends on your employment status and how much you’re able to contribute.

Sometimes when we talk about the best retirement plans, we are referring to the various accounts used for saving money for retirement. Other times we are talking about all the various issues related to having a secure retirement — knowing how much you will need, what to do about Social Security, housing, budgets and more.

If you need a detailed strategy for figuring out the financial details of your life after retirement, then you might want to use the NewRetirement retirement calculator, named a best retirement calculator by the American Association of Individual Investors (AAII).

If you are trying to figure out which kind of 401(k), IRA or other plan is best for you, keep reading.

Individual retirement account (IRA)

individual retirement account
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One of the best retirement plans regardless of employment status is an individual retirement account. An IRA is basically a savings account with big tax breaks, allowing you to sock away cash that grows tax-free.

For 2020, you can contribute up to $6,000 to an IRA. The catch-up contribution for people 50 or older is $1,000 per year, so you can save up to $7,000 with tax advantages.

You may be able to claim a deduction on your federal income tax return for the amount contributed to an IRA. If you are covered by a retirement plan at work, the deductible portion of your contribution depends on your filing status and your modified adjusted gross income (MAGI).

This table from the IRS can tell you if your deduction will be limited. A deduction is allowed in full if you are not covered by a retirement plan at work.

If you make an IRA contribution that is not deductible, you’ll still get a tax benefit eventually. Non-deductible contributions can be withdrawn tax-free in retirement. You’ll keep track of the non-deductible contributions on Form 8606 of your individual tax return.

Roth IRA

investing
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A Roth IRA is similar to a traditional IRA except that the tax benefits are realized when you withdraw the money rather than when you put it in. Contributions to Roth IRAs are never deductible, but the contributions and earnings can be withdrawn tax-free in retirement. That’s a pretty nice perk if you expect to be in a higher income tax bracket in retirement.

Like the traditional IRA, contributions to a Roth are limited to $6,000 for 2020 ($7,000 if you’re age 50 or older).

Contributions to a Roth are also limited by your MAGI. If you’re a married couple filing jointly, your MAGI must be under $203,000 for the tax year 2019 and $206,000 for the tax year 2020.

Pensions

Senior Man w Money
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Pensions are a great vehicle for retirement savings — if you can get one through your employer.

Previous generations tended to stay with the same company for many years — perhaps even their entire career. In exchange, their employers provided for their retirement years with pensions, a guaranteed amount of monthly income from retirement until death.

Unlike a 401(k) plan, which will be discussed next, the income you’ll receive in retirement from a pension is not affected by the performance of the stock market. All investment risk is on the plan provider.

Today, company-sponsored pension plans are practically unheard of. Pensions are both more expensive and riskier to employers than a 401(k) plan.

401(k)

401K
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A 401(k) plan is primarily funded through employee contribution via pre-tax payroll deductions. Contributed money can usually be placed into numerous investments, including stocks, bonds, mutual funds and ETFs, depending on what options the employer offers through the plan. Like IRAs, the investments in a 401(k) are able to grow tax-free, but they are taxable when funds are withdrawn in retirement.

There are two features of 401(k) plans that make them a better option for retirement savings than IRAs. First, contribution limits for 401(k) plans are higher. For 2020, you can contribute up to $19,500 to a 401(k) plan, with an additional “catch-up” contribution limit of $6,500 if you’re age 50 or older.

Second, many employers offer matching contributions, which equals “free money” for plan participants. If your employer offers matching contributions, make sure you’re at least contributing enough to get the full match, otherwise you’re not taking full advantage of your total compensation package.

Some employers also offer Roth 401(k) options. If you opt for the Roth version, your contributions will be made with after-tax dollars and won’t be taxed upon withdrawal.

403(b)

Investing
PHOTOBUAY / Shutterstock.com

A 403(b) plan is similar to a 401(k) in that it allows employees to make pre-tax contributions into a retirement plan, but these plans only available for employees at a church, school, hospital or other nonprofit organization.

While contribution limits are the same as 401(k) plans, investments in the 403(b) plan are limited to annuities and mutual funds. For a more in-depth look at 403(b) plans, check out this article.

SIMPLE IRA

A tree symbolizing investment growth
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A SIMPLE IRA is a retirement plan that may be established by employers, including self-employed individuals. Employees are able to make pre-tax contributions to the plan, which are taxable when they’re withdrawn in retirement.

If your employer offers a SIMPLE IRA, they are required to make either matching contributions to the plan or nonelective contributions, which are paid to each eligible employee regardless of whether the employee contributed.

SIMPLE IRAs are usually the plan of choice for small employers since they are easier to administer.

Like a 401(k), employees can make pre-tax contributions to a SIMPLE IRA, but the contribution limits are lower. For 2020, employees can contribute $13,500 to a SIMPLE IRA, and after age 50 can contribute an additional $3,000 per year in catch-up contributions.

SEP IRA

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A simplified employee pension (SEP) IRA allows a small-business owner to make tax-deductible contributions on behalf of eligible employees, including the business owner. A SEP is available to employers of any size and allows for contributions of up to 25% of each employee’s pay, up to a limit of $57,000 in 2020.

They are generally easy to establish and involve very little paperwork, but only the employer can contribute to the SEP. Employees are not able to make pre-tax contributions. For sole proprietors, this is not an issue, but business owners with employees may want to consider a 401(k) plan in order to allow employees to contribute.

Solo 401(k)

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A solo 401(k), also known as an individual 401(k), is very similar to a traditional 401(k) plan, but it’s strictly for sole proprietors who have no employees (other than a spouse who works for the business). Like a traditional 401(k), a solo 401(k) can come in both traditional and Roth versions.

Solo 401(k)s are ideal if you want to sock away large sums of money since you can save for retirement both as an employer and as an employee. As an employee, you can contribute the standard 401(k) contribution limit of $19,500 in 2020, or $26,000 in 2020 if age 50 or over. As your own employer, you can contribute an additional 25% of compensation, up to a maximum of $57,000 including your employee contributions.

Since these amounts are discretionary, you can save the maximum in profitable years and reduce or even eliminate contributions in leaner years.

The downside to a solo 401(k) is the amount of administration required. Solo 401(k) plans require more paperwork than SEP IRAs and if your account balance exceeds a certain amount, you’ll have to file a separate tax return for the plan, which can increase your tax preparation costs. A solo 401(k) also comes with setup charges and annual fees, so they’re more expensive than a SEP IRA.

Defined benefit plan

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A defined benefit plan is essentially a pension because it allows for a predetermined benefit at retirement regardless of market fluctuations.

While large-employer pensions are all but extinct, some self-employed and small-business owners choose to start defined benefit plans in order to save aggressively for retirement while realizing significant tax benefits.

A defined benefit plan is funded with employer contributions only and must be funded annually. Annual contributions are calculated based on several factors, including age, compensation and retirement age. If you have employees, you must contribute for all eligible employees. Contributions are 100% tax-deductible and earnings grow tax-free but are taxable when withdrawn.

Defined benefit plans work best for self-employed people age 50 or older who can make annual contributions of $80,000 or more for at least five years and have few, if any, employees. The plan takes a while to set up and must be established by the end of your business’ fiscal year (usually December 31).

While defined contribution plans have some of the highest contribution limits, there are also substantial costs and administrative requirements based on the terms of your plan, including annual actuarial calculations, required annual funding and filing fees for IRS Form 5500.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

Posted on February 28, 2021

Rollover IRA vs. Traditional IRA: What’s the Difference?

When it comes to retirement savings, one of the building blocks of many strategies is the individual retirement account, or IRA. An IRA is a retirement plan that allows individuals to save money in a tax-advantaged way. In some cases, an individual might open a traditional IRA, and in others, they might have investments from a previous retirement plan that they need to roll over into a rollover IRA.

When it comes to a traditional IRA vs. rollover IRA, there are many similarities— but also a few differences worth noting.

What Is a Traditional IRA?

To understand the difference between a rollover IRA vs. traditional IRA, it helps to understand some IRA basics.

From the moment you open a traditional IRA, your contributions to the account are typically tax deductible, so your savings will grow tax-free until you make withdrawals in retirement. This is advantageous to some retirees: Upon retiring, it’s likely one might be in a lower income tax bracket than when they were employed. Given that, the money they withdraw will be taxed at a lower rate than it would have when they contributed.

What is a Rollover IRA?

A rollover IRA is an IRA account created with money that’s being rolled over from a qualified retirement plan. Generally, rollover IRAs happen when someone leaves a job with an employer-sponsored plan, such as a 401(k) or 403(b), and they roll the assets from that plan into a rollover IRA.

In a rollover IRA, like a traditional IRA, your savings grow tax-free until you withdraw the money in retirement. There are several advantages to rolling your employer-sponsored retirement plan into an IRA, vs. into a 401(k) with a new employer:

•  IRAs may charge lower fees than 401(k) providers.
•  IRAs may offer more investment options than an employer-sponsored retirement account.
•  You may be able to consolidate several retirement accounts into one rollover IRA, simplifying management of your investments.
•  IRAs offer the ability to withdraw money early for certain eligible expenses, such as purchasing your first home or paying for higher education. In these cases, while you’ll pay income taxes on the money you withdraw, you won’t owe any early withdrawal penalty.

There are also some rollover IRA rules that may feel like disadvantages to putting your money into an IRA instead of leaving it in an employer-sponsored plan:

•  While you can borrow money from your 401(k) and pay it back over time, you cannot take a loan from an IRA account.
•  Certain investments that were offered in your 401(k) plan may not be available in the IRA account.
•  There may be negative tax implications to rolling over company stock.
•  An IRA requires that you start taking Required Minimum Distributions (RMDs) from the account at age 72 (or age 70 ½ if you turn 70 ½ in 2019 or earlier), even if you’re still working, whereas you may be able to delay your RMDs from an employer-sponsored account if you’re still working.
•  The money in an employer plan is protected from creditors and judgments, whereas the money in an IRA may not be, depending on your state.

A Side-by-Side Comparison of Rollover IRA vs. Traditional IRA

  Rollover IRA Traditional IRA
Source of contributions Created by “rolling over” money from another account, most typically an employer-sponsored retirement plan, such as 401(k) or 403(b). For rollover amount, annual contribution limits do not apply. Created by regular contributions to the account, not in excess of the annual contribution limit, although rolled-over money can also be contributed to a traditional IRA.
Contribution limits There is no limit on the funds you roll over from another account. If you’re contributing outside of a rollover, the limit is $6,000 per year, plus an additional $1,000 if you’re 50 or older. Up to $6,000 per year, plus an additional $1,000 if you’re 50 or older.
Withdrawal rules Withdrawals before age 59½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home). Withdrawals before age 59½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home).
Required minimum distributions (RMDs) You’re required to withdraw a certain amount of money from this account each year once you reach age 72. You’re required to withdraw a certain amount of money from this account each year once you reach age 72.
Taxes Since contributions are from a pre-tax account, all withdrawals from this account in retirement will be taxed at ordinary income rates. If contributions are tax deductible, all withdrawals from this account in retirement will be taxed at ordinary income rates. (If contributions were non-deductible, you’ll pay taxes on only the earnings in retirement.)
Future rollover options As long as no other (non-rollover) funds have been added to the account, this money can be rolled into a future employer’s retirement plan, if the plan allows it. The money in a traditional IRA cannot be rolled into a future employer’s retirement plan.
Convertible to a Roth IRA Yes Yes

Is There a Difference Between a Traditional IRA and a Rollover IRA?

The money you roll over to a rollover IRA can later be rolled over into an employer-sponsored retirement plan, if the plan allows it. This is not true of money in a traditional IRA.

When it comes to a rollover IRA vs. traditional IRA, the only real difference is that the money in a rollover IRA was rolled over from an employer-sponsored retirement plan. Otherwise, the accounts share the same tax rules on withdrawals, required minimum distributions, and conversions to Roth IRAs.

Can You Contribute to a Rollover IRA?

You can make contributions to a rollover IRA, up to IRA contribution limits. In 2020 and 2021, individuals can contribute up to $6,000 (with an additional catch-up contribution of $1,000 if you’re 50 or older). If you do add money to your rollover IRA, however, you may not be able to roll the account into another employer’s retirement plan at a later date.

Can You Combine a Traditional IRA with a Rollover IRA?

A rollover IRA is essentially a traditional IRA that was created when money was rolled into it. Hence, you can combine two IRAs by having a direct transfer done from one account to another, or by rolling money from one IRA to the other IRA.

There’s one important aspect of the transfer or rollover process that will help prevent the money from counting as an early withdrawal or distribution to you—and that’s being timely with any transfers. With an indirect rollover, you typically have 60 days to deposit the money from the now-closed fund into the new one.

A few other key points to remember: As mentioned above, if you add non-rollover money to a rollover account, you may lose the ability to roll funds into a future employer’s retirement plan. Also keep in mind that there’s a limit of one rollover between IRAs in any 12-month period. This is strictly an IRA-to-IRA limit and does not apply to rollovers from a retirement plan to an IRA.

How to Open a Traditional or Rollover IRA Account

Opening a traditional IRA and a rollover IRA are identical processes—the only difference is the funding. Open a traditional or rollover IRA by doing the following:

•  Decide where to open your IRA. For instance, you can choose an online brokerage firm where you can choose your own investments, or you can select a robo-advisor that will offer automated recommendations based on your answers to a few basic investing questions. (There’s a small fee associated with most robo-advisors.)
•  Open an account. From the provider’s website, select the type of IRA you’d like to open—traditional or rollover, in this case—and provide a few pieces of personal information. You’ll likely need to supply your date of birth, Social Security number, and contact and employment information.
•  Fund the account. You can fund the account with a direct contribution via check or a transfer from your bank account, transferring money from another IRA, or rolling over the money from an employer-sponsored retirement plan. Contact your company plan administrator for information on how to do the latter.

The Takeaway

Both a rollover IRA or traditional IRA allow investors to put money away for retirement in a tax-advantaged way, with very little difference between the two accounts.

One of the primary questions anyone considering a rollover IRA should consider is, will you keep contributing to it? If so, that would prevent you from rolling the rollover IRA back into an employer-sponsored retirement account in the future.

Whether it’s a rollover IRA you’ve created by rolling over an employer-sponsored retirement account or a traditional IRA you’ve opened with regular contributions, either account can play a key role in your retirement game plan.

Interested in learning more about growing your savings with an IRA? Explore IRA accounts at SoFi and read about the broad range of investment options, member services and investment tools available.

Find out how to save for retirement with SoFi.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

SOIN20277

Source: sofi.com

Posted on February 27, 2021

How the SECURE Act Affects Your Retirement & Estate Planning

In late December 2019, President Donald Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (SECURE Act).

Many of the changes volleyed around Capitol Hill for years, and proponents tout them as the most comprehensive retirement changes since the 2006 Pension Protection Act. Given its bipartisan support, the changes aren’t exactly revolutionary. Most changes are incremental, tweaking the existing retirement account rules.

And being a bipartisan bill, it also includes a clever way to raise tax revenue without raising tax rates. Everyone in Washington gets to clap themselves on the back after such maneuvers.

As you plan your retirement, make sure you understand the new rules and adjust your estate planning based on the new rules on inherited IRAs.

Inherited IRAs: Drain in 10

Before the SECURE Act, people who inherited an individual retirement account (IRA) could spread out the withdrawals over their entire lifetime. They still had to take required minimum distributions (RMDs) based on their age, life expectancy, and the amount available in the account. But heirs could spread their withdrawals out over their entire remaining life expectancy.

The days of these “stretch IRAs” are over. The most significant change of the SECURE Act was to require account owners to empty all inherited retirement accounts within 10 years – a clause quickly labeled the “drain-in-10” rule. It removes annual RMDs, instead merely requiring that nothing remains in the account 10 years after passing to an heir.

Note that the drain-in-10 rule applies to non-Roth retirement accounts like traditional IRAs, 401(k)s, and SIMPLE IRAs. Roth accounts come with their own separate inheritance rules, which have remained unchanged.

The Purpose of the Drain-in-10 Rule

Why did Congress stop allowing heirs to draw on their inheritance at a slower, more responsible pace?

In a word, revenue. The IRS taxes withdrawals from traditional IRA accounts as regular income. By forcing heirs to withdraw all the money relatively quickly, the IRA distributions drive heirs’ taxable income into higher tax brackets.

Imagine you’re a single person earning a modest $40,000 per year. According to the 2021 federal income tax brackets, you pay 10% for roughly the first $10,000 of that and 12% for the next $30,000. Your last remaining parent dies and leaves you $400,000 from their IRA.

No matter what, you have to pay taxes on withdrawals. But previously, you could spread withdrawals over the rest of your life and enjoy much of that inheritance as retirement income. For example, you could take $15,000 per year from it to supplement your income, paying the higher 22% tax rate on it since it drove your income into the next tax bracket.

Because of the SECURE Act, you now must instead take $40,000 per year on it, plus returns. You pay the higher 22% tax rate on $40,000 rather than $15,000. The money also stops compounding, as it had been as untouched pre-tax funds in an IRA.

It amounts to serious tax revenue too. Estimates from the Congressional Budget Office put the additional tax revenue from this new rule at $15.7 billion over the next 10 years.

And if you fail to take the required minimum distributions, you must pay the IRS a 50% penalty on the amount you fail to take. Thus, if you were required to withdraw $10,000 but don’t, you pay a $5,000 penalty to the IRS.

Irs Tax Revenue Form Magnifying Glass

Exceptions to the Drain-in-10 Rule

The SECURE Act took effect on Jan. 1, 2020, and is not retroactively applied. Any taxpayers who inherited an IRA or 401(k) previously are exempt.

Other exceptions include surviving spouses, heirs no more than 10 years younger than their benefactor – such as siblings – and people with disabilities. Spouses can roll the inherited IRA into their own traditional IRA or spousal IRA.

Nonspouses cannot roll over funds from an inherited IRA into their own. Their only option is to withdraw the money at regular income tax rates.

A fourth exception exists for minors. The drain-in-10 rule only kicks in once the minor children turn 18 and reach the age of majority. As such, children who inherit an IRA have until age 28 to empty the account without facing IRS penalties.

Problems Trusts Create for Heirs

Some benefactors put their money into trusts upon their death, with detailed instructions for how to release the funds in their estate plan. In some cases, the trust pays out funds a little at a time or releases them only after a predetermined number of years.

These restrictive trusts can create a problem for designated beneficiaries (heirs). For example, if a trust only allows the beneficiary to take the RMD, that could mean releasing the entire balance all at once after 10 years – and require the beneficiary to pay massive income taxes on it.

Forcing heirs to take the entire balance of trust funds in no more than 10 years can also defeat the whole purpose: to spread the inheritance out over many years to prevent the heir from blowing the money on sports cars and gadgets and designer clothing.

Ideas to Minimize Taxes

If you’re planning your estate, talk to a financial advisor before you do anything else. The tax rules on inheritances are complicated and made even more so by estate planning rules. If you don’t currently have a financial advisor, you can find one in your area through SmartAsset.

Benefactors who have set up trusts for their heirs to receive an IRA must consider their structure carefully and make sure they don’t force their heirs to take the entire amount all at once.

One option is to use part of the IRA funds to create a life insurance policy through Bestow with your heir as the named beneficiary. You do pay taxes on premium costs, but your heir doesn’t pay taxes on the payout.

You can also look into trustee-to-trustee transfers for IRA inheritances. But these get complicated quickly, so talk to an estate planning attorney or tax specialist through H&R Block.

If you’re on the receiving end of an IRA inheritance, common sense suggests spreading the withdrawals evenly over the 10 years to minimize your tax burden. You can put the money into your own tax-sheltered retirement accounts, whether an employer-sponsored account, like a 401(k) or 403(b), or an IRA.

Alternatively, if you’re near retirement age, you can wait until you retire before taking withdrawals. You avoid pulling money from the inherited IRA while also collecting earned income, so the combination doesn’t drive up your income tax bracket. Even better, you can delay pulling any money from your own retirement accounts, leaving them to compound and minimizing your sequence of returns risk.

Pro tip: If you haven’t set up your will, consider doing so through a company like Trust & Will. They make the whole process simple and are available to answer any questions you might have along the way.

Additional Retirement Account Changes

While the new drain-in-10 change to inherited IRAs stirred up the most controversy and angst among investors, it’s far from the only change created by the SECURE Act.

Make sure you understand all the rule changes, whether you’re planning out your own retirement investments or you’re a small-business owner considering a retirement plan for your employees.

1. No More Age Restriction on Traditional IRA Contributions

Before the SECURE Act, Americans over age 70 1/2 couldn’t contribute to their traditional IRA accounts.

But Americans are living longer, which usually means they need to work longer and save more to afford retirement. The SECURE Act allows Americans of any age to continue adding money to their traditional IRA.

And why not? From the perspective of the IRS, they can allow older Americans to keep contributing, safe in the knowledge the funds can only remain untaxed for a maximum of 10 years after the contributor’s death.

Particularly savvy planners can take advantage of the ceiling removal with backdoor Roth contributions, allowing them more flexibility to shuffle money based on that year’s income. But talk to a financial planner about such complex maneuvering before trying it at home.

2. Higher Age for Required Minimum Distributions

Under the previous rules, IRA owners had to start taking RMDs at age 70 1/2. The SECURE Act raised the minimum starting age for RMDs to age 72. Again, it only makes sense, with Americans living and working longer.

The exception to the RMD age remains in place: Americans who continue working and don’t own more than 5% of the company where they work don’t have to take RMDs. After retiring, they must start taking RMDs if they’re over age 72.

Retirement Planning Old Couple Walking Up Stacks Of Coins

3. Annuities in 401(k) Plans

Almost no employers included annuities as an option in their 401(k) plans before the SECURE Act. The reason was simple: the old laws held employers liable as having fiduciary responsibility for annuities included in their 401(k) plans.

But the insurance industry lobbied hard to change that rule, and their lobbying dollars paid off in the SECURE Act. The onus of responsibility now falls to insurance providers, not employers, which opens the doors for employers to start considering annuities as options in their retirement plans.

Annuities are complex investments that pay out income over time. Before choosing one in your employer-sponsored plan, speak with a financial advisor about the exact implications, risks, and rewards.

4. More Options for Part-Time Employees

Under the previous laws, employers only had to offer participation in their retirement plans to employees who worked at least 1,000 hours per year for them.

The SECURE Act requires employers to allow more part-time employees to opt in. While the previous rule still applies, employers must also allow access to all employees who work at least 500 hours per year for three consecutive years or more.

The requirement protects part-time employees increasingly piecemealing their income and participating in the gig economy. Saving for retirement is hard enough, even with an employer-sponsored plan. Surviving in a job without benefits makes it dramatically harder.

5. Penalty-Free Withdrawals for New Children

Having children is expensive. Really, really expensive.

The SECURE Act allows account holders to withdraw up to $5,000 from their retirement account when they give birth or adopt a child. The withdrawal is subject to regular income taxes, but it is not subject to the standard 10% penalty.

While not an earth-shaking change, it does make retirement accounts more flexible and encourages Americans to contribute money toward them. The new-child exception works similarly to the down payment exception, which allows account holders to withdraw up to $10,000 from their IRA penalty-free to buy a home.

6. Multiple-Employer Retirement Plans

In a bid to help more employers offer retirement plans, the SECURE Act makes it easier for multiple employers to band together to negotiate affordable plans.

The law removes tax penalties previously faced by multiple-employer plans if one employer failed to meet the requirements. The old law penalized all participating employers. The SECURE Act removed this so-called one-bad-apple rule.

The act also removes another restrictive rule: the requirement that employers must share a “common characteristic” to come together to offer their workers a multiple-employer plan. In practice, that typically meant only companies in the same industry formed multiemployer plans. Now, any group of employers can come together to negotiate with plan administrators and provide the best possible plans for employees.

7. Incentives for Auto-Enrollment

A 2019 study by T. Rowe Price found a startling fact. When employees had to opt into employer-sponsored plans voluntarily, only 44% of them did so. When the employer auto-enrolled them, requiring them to opt out rather than in, the participation rate nearly doubled to 86%.

It makes sense. People tend to take the path of least resistance. But it also means one of the easiest ways to increase employee participation is simply to encourage employers to auto-enroll them.

The SECURE Act creates a new tax credit for employers who start auto-enrolling their employees in a company retirement plan. Though it’s only $500, the tax credit applies not only to employers who start a new retirement plan but also to those who start auto-enrollment for their existing plan. Employers can take it for up to three years after they start auto-enrolling employees for a maximum total tax credit of $1,500.

Finally, it raises the ceiling on what percentage of income employers can set as a default employee contribution. The previous default limit was 10%, and the SECURE Act raises it to 15%.

8. Increase in Tax Credit for New Employer-Sponsored Retirement Plans

Under the previous law, employers could take a maximum tax credit of $500 for up to three years when they started offering a retirement plan for employees.

The SECURE Act expands the tax credit. Employers can claim a tax credit of $250 per eligible employee covered, with a maximum tax credit of $5,000. Sweetening the pot, employers can also take the $500 tax credit for auto-enrolling employees on top of the tax credit for creating a new employer-sponsored retirement plan.

While these numbers seem small, they help offset the costs for small businesses who want to offer retirement plans but have little spare money to spend on them.

Final Word

The SECURE Act is 125 pages long and includes additional provisions not listed above. For example, it requires 401(k) plan administrators to offer “lifetime income disclosure statements,” breaking down the income potential of various investments. Insurance companies can use these income potential breakdowns as a marketing device to pitch their annuities by demonstrating with convenient examples just how much better off they think employees will be if they opt for an annuity over “high-risk” equity funds.

For a full explanation of how the SECURE Act impacts your retirement planning, estate planning, and tax planning, speak to your financial advisor. While many of the changes in the act involve simple tweaks, the change in rules for inherited IRA funds, in particular, has complex implications for your estate planning.

When in doubt, invest more money in your tax-sheltered retirement accounts. After all, it’s better to build too much wealth for retirement than not enough.

Source: moneycrashers.com

Posted on February 26, 2021

What’s the Best Online Tax Prep Software? – TaxAct vs TurboTax vs H&R Block

In recent years, it’s taken me much longer than I’d like to complete and e-file my state and federal income tax returns. That’s because I’ve spent some time evaluating the most popular online tax preparation software available to filers in the United States, including TurboTax, TaxAct, and H&R Block.

All three have a similar set of core features and capabilities, including the ability to e-file. That can make it challenging to differentiate among them at a glance. But there are differences.

Before choosing one, learn how TurboTax, TaxAct, and H&R Block stack up — and what’s new for the 2020 tax year.

Online Tax Preparation Software Evaluation Method

I’ve done my own taxes and run this comparison for several years in a row. As my tax situation has changed, so have my experiences. For example, during the 2014 tax year, I moved across state lines, forcing me to file two state tax returns.

For the 2020 tax year, I used the same mock tax situation for all three programs to ensure an apples-to-apples comparison. Though it’s a bit more complicated than my actual tax situation, it allows me to explore each platform in greater depth than I otherwise would. Its highlights include:

TurboTax, H&R Block, and TaxAct all have a maximum refund-minimum tax liability guarantee. That means each service waives your prep fees if you can prove another program produces a higher tax liability or lower refund on an identical tax situation.

With these three programs, my federal and state tax liabilities have always been identical across the board. However, the time and expense of preparing with each service vary considerably.

Key Features

TaxAct, TurboTax, and H&R Block have many features and capabilities in common. TurboTax and H&R Block are especially close cousins, offering tax prep assistance from human experts for users who want it. However, each program is distinct enough to warrant close examination on the merits.

DIY Tax Prep Plans & Pricing

Each of these tax prep services can handle virtually any personal income tax situation, from straightforward to very complex. All offer multiple DIY tax prep plans that correspond to general positions on the complexity spectrum. Notably, all offer a free plan for filers with relatively simple situations.

DIY Tax Prep Plans & Pricing for H&R Block

Pricing for H&R Block’s DIY tax prep plans rises as the tax season progresses. Early birds get better deals (at the lower end of the ranges specified here) than those who prep and file as the deadline approaches.

  • Free. This plan offers free federal and state filing for simple to moderately complex situations. If you can file your taxes using Form 1040 without any additional schedules, the free plan is for you.
  • Deluxe. The deluxe plan costs $23.99 to $49.99 for federal prep and filing and $36.99 to $49.99 for each state return, depending on when you file. It’s appropriate for filers who need to itemize deductions, import a prior-year tax return from another tax prep service, or access H&R Block’s in-house phone support team.
  • Premium. The premium plan costs $39.99 to $69.99 for federal prep and filing and $36.99 to $49.99 for each state, depending on the filing date. It supports a range of more complex activities, including investment activity and rental property ownership.
  • Self-Employed. The self-employed plan costs $67.99 to $84.99 for federal prep and filing and $36.99 to $49.99 for each state, depending on the filing date. It’s appropriate for self-employed individuals and small-business owners.

DIY Tax Prep Plans & Pricing for TurboTax

Like H&R Block, TurboTax varies pricing as the tax season progresses. But its plans are a bit more expensive than either H&R Block’s or TaxAct’s.

  • Federal Free Edition. This plan offers free state and federal filing for relatively simple situations — filing using Form 1040 with no attached schedules. A state fee may apply as the filing deadline approaches, so prep early to avoid surprises.
  • Deluxe. The deluxe plan costs $40 to $60 for federal DIY tax prep and filing and $40 to $50 per state return, depending on when you file. It’s appropriate for filers who wish to itemize deductions. It also has some additional features, such as prior-year return importing from other tax prep programs, live phone support, and online tax return editing for up to three years after filing.
  • Premier. The premier plan costs $70 to $90 for federal DIY tax prep and $40 to $50 per state return, depending on when you file. It’s appropriate for many complex tax situations, including active investing and rental property ownership, but can’t support situations involving pass-through income via a formal legal business structure.
  • Self-Employed. The self-employed plan costs $90 to $120 for DIY tax prep and $40 to $50 per state return, depending on when you file. It’s appropriate for self-employed individuals and small-business owners with pass-through income.

DIY Tax Prep Plans & Pricing for TaxAct

Like H&R Block and TurboTax, TaxAct pricing is subject to change, depending on when you file. Lower prices represent early-season discounts that may disappear at any time.

  • Free Edition. Like TurboTax’s and H&R Block’s free plans, TaxAct’s covers federal and state prep and filing fees. It’s appropriate for most people who can file using Form 1040 only with no additional schedules.
  • Deluxe. The deluxe plan costs $24.95 to $44.95 for federal prep and filing and $44.95 per state return, depending on when you file. It’s appropriate for people who wish to itemize deductions.
  • Premier. The premier plan costs $34.95 to $69.95 for federal prep and filing and $44.95 per state return, depending on the filing date. It’s appropriate for equities market investors, rental property owners, people with foreign financial accounts, and people who earn passive income reported on Schedule K-1 (but not those actively involved in self-employment or business ownership activity).
  • Self-Employed. The self-employed plan costs $64.95 to $79.95 for federal prep and filing and $44.95 per state return, depending on the filing date. It’s appropriate for self-employed individuals and small-business owners. It also includes additional features for these groups, such as a deduction-maximizer tool that supports year-round expense tracking from your TaxAct account.

Tax Prep Assistance From Human Experts

H&R Block and TurboTax both offer varying degrees of hands-on tax prep assistance from in-house trained tax preparers, Enrolled Agents (EAs), or certified public accountants. H&R Block makes these resources available online and in-person (albeit at a much higher fee), while TurboTax limits hands-on assistance to the online realm only. TaxAct does not offer expert tax prep assistance.

H&R Block’s Expert Tax Prep Assistance Options & Capabilities

H&R Block offers two online expert-assistance packages: Online Assist and Tax Pro Go. Online Assist only provides human experts to review the client’s return for accuracy and tax optimization. Tax Pro Go is a true full-service package in which remote human preparers complete clients’ returns for them.

  • Online Assist. H&R Block bases Online Assist pricing on the complexity of your return, but it generally adds at least $40 to your prep costs. Covering a thorough review by a tax professional and their corrections to your return, you can access it as an add-on to any DIY package.
  • Tax Pro Go. Tax Pro Go users upload their tax documents, such as income statements, to H&R Block’s secure portal. Human preparers do the rest. Pricing is also custom and based on the complexity of the return. It’s comparable to what human CPAs charge for hands-on tax prep (and what H&R Block charges for its own in-office tax prep services). My total state and federal filing cost would have been upward of $250 for the 2020 tax year.

H&R Block also offers in-person tax prep assistance at thousands of storefront office locations across the U.S. If you find yourself at a tax prep impasse at any point and don’t want to use one of H&R Block’s digital expert-assistance packages, you can make an appointment at an H&R Block office and complete it with truly hands-on help.

TurboTax’s Expert Tax Prep Assistance Options & Capabilities

TurboTax also offers two expert tax prep assistance packages: TurboTax Live and TurboTax Live Full-Service. TurboTax Live involves on-demand consultation with and tax advice from TurboTax CPAs or EAs as you prepare your own taxes. TurboTax Live Full-Service is a hands-on prep package that only asks the filer to upload their tax documents and sign off on their completed returns.

  • TurboTax Live. Appropriate for all situations, this package is available as an add-on to any DIY tax prep plan. It adds $50 to $80 to the final plan cost, depending on the plan level. Early-bird pricing ranges from $90 for deluxe clients to $170 for self-employed clients. Late-filing pricing is generally $30 higher, regardless of the plan.
  • TurboTax Live Full-Service. Ideal for very complicated situations, such as business ownership, TurboTax Live Full-Service is priced on par with full-service independent CPA tax prep. As with H&R Block’s Tax Pro Go package, I would have paid upward of $250 for state and federal filing for the 2020 tax year.

TurboTax does not have a network of brick-and-mortar locations and thus does not offer in-person tax prep. However, TurboTax Live Full-Service can accommodate virtually any prep-related issues, no matter how tricky or unusual.

TaxAct’s Expert Tax Prep Assistance Options & Capabilities

TaxAct doesn’t offer expert tax prep assistance, making it best for experienced DIY filers who are confident they won’t need professional help. If you get stuck while prepping with TaxAct, you can always take what you have so far to a professional tax preparer in your area.

Federal Tax Prep Process

I’ve prepared my taxes with these three programs for several years running. What follows is a condensed summary of my experience with each, including total prep time, total cost, version used, and observations of key features and functions.

H&R Block’s Federal Tax Prep Process.

  • Time Spent Preparing: 90 minutes
  • Version Used: Premium (In past years, I began with the free version and upgraded only after being prompted, but in 2019 and 2020, I went straight to premium)
  • Total Cost: $76.98

H&R Block is one of the most popular online tax preparation programs around. Despite its plethora of brick-and-mortar offices, filing online is both more convenient and — in most cases, at least — significantly cheaper than filing in person. H&R Block’s software uses an interview-style process that takes you through your taxes step by step, ensuring you don’t miss any crucial forms or schedules.

The platform’s drag-and-drop return upload feature is a big time-saver over the more cumbersome importing tools common to truly bare-bones discount tax prep platforms, such as TaxHawk and FreeTaxUSA.

Also helpful is the last page of each section, which includes a concise summary of the information you enter. If anything looks amiss, you can go back to the corresponding page and edit the erroneous information with one click.

These features also appear in H&R Block’s mobile-friendly Web version and its powerful mobile tax prep app, which has all the main features and capabilities of its standard Web version. You can move seamlessly between the mobile app and Web version to work on your saved return as needed. And you can e-file your return right from the app if that’s most convenient for you.

Another bonus of the service is H&R Block’s transparent pricing. You know exactly how much you’ll pay to file before you do so, and H&R Block makes any pricing increase crystal-clear before you upgrade.

But thanks to the impressive help button on the left sidebar, you may not need to upgrade. When clicked, it produces a pop-up window that lists popular help topics in question form and features a search bar for less common queries.

That makes it easy to get clarification without having to exit your work or open a new window. I’ve played around with this feature quite a bit in the past and never failed to learn something new each time.

TurboTax’s Federal Tax Prep Process

  • Time Spent Preparing: 100 minutes
  • Version Used: Premier. (In past years, I’ve started with the federal free version and upgraded in steps as TurboTax prompted me to move to the cheapest version that could handle my mock situation each time I provided an interview answer the current version couldn’t; this year, I had enough experience to know what I needed)
  • Total Cost: $110

TurboTax is another top-rated online tax filing program owned by Intuit, one of the country’s best-known financial software firms. Appropriately, its interview-style preparation process is extremely intuitive, demystifying tax issues for novice filers.

TurboTax also has a clean, mobile-friendly layout and a high-quality mobile app, not to mention excellent customer support at all plan levels. Phone support is available only with deluxe and higher plans, but it also has a dynamic, user-supported knowledge base.

I have experienced some functionality issues with TurboTax in the past, but these haven’t been disruptive of late. Overall, TurboTax seems to grow more user-friendly every season.

One feature that sets TurboTax apart is the ability to import prior-year returns from any tax prep service as long as the return is in PDF format. TurboTax has long been a leader in this respect, with competitors — namely H&R Block — only belatedly joining it. (To be fair, H&R Block now offers seamless prior-year importing as well.) Robust PDF importing capability is hugely helpful for first-time users.

TurboTax eases you into the interface with helpful pop-up windows that explain the platform’s key features, such as the help bar and internal navigation tools. TurboTax has consistently been (and continues to be) among the most user-friendly tax prep programs around.

TurboTax’s prep interface is blissfully easy to navigate. Its questions are more pointed and easier to understand than H&R Block’s, and the platform rarely presents confusing or vague information. At the beginning of each section, TurboTax takes care to call out less common situations and forms, subtly directing you toward tax forms or rules that are more likely to apply.

The platform also places helpful pop-up buttons next to elements that may require explanations, such as schedules and types of income. Clicking on the button creates a pop-up window that explains the topic in detail. For filers in a rush, it’s a time-saving alternative to searching the knowledge base.

TurboTax waits until you’re done with state taxes to review everything. It’s a marginal time-saver compared to H&R Block’s federal-only and state-only reviews. However, when I attempt to move backward in my federal return to check something manually, I’m occasionally stymied by an HTML error. It happens less frequently than it used to but is worth noting nonetheless.

TurboTax Live — first introduced in the 2017 tax year — is a huge help for filers with complicated situations and comes at a substantial discount to the cost of filing with a CPA. TurboTax Live Full-Service, a new addition for the 2020 tax year, costs still more but is ideal for taxpayers who don’t want anything to do with the prep process but don’t want to visit a CPA in person.

TaxAct’s Federal Tax Prep Process

  • Time Spent Preparing: 115 minutes
  • Version Used: Premier. (In the past, I’ve used the free version, but recent updates have rendered it unsuitable for situations as complex as my mock situation)
  • Total Cost: $79.90

TaxAct’s prep process and fee structure have changed significantly since the early 2010s, when the free version supported the vast majority of available tax forms and schedules and could therefore accommodate virtually any individual tax situation. Today, its pricing model and process are much more in line with TurboTax’s and H&R Block’s, albeit at a slightly lower price point.

TaxAct’s prep interface uses interview-style questions, but the interface is more exhaustive and less responsive to user answers than TurboTax’s or H&R Block’s. Specifically, the system may ask you questions about specific situations that don’t apply to you based on previous answers, whereas TurboTax and H&R Block seem to learn better from earlier responses.

This aspect of TaxAct is less tedious and time-consuming than it has been in the past, though overall prep time is still higher than with TurboTax or H&R Block. With large text and buttons and straightforward navigation, TaxAct’s main website is nearly as mobile-friendly as TurboTax’s and H&R Block’s and significantly more so than true discount programs, like FreeTaxUSA. TaxAct also has a dedicated mobile and tablet app that supports relatively simple tax situations, but this solution isn’t appropriate for filers with self-employment income.

No matter how you choose to use the platform, TaxAct has long had some free or low-cost features designed to simplify and streamline the tax prep process. For instance, early-bird filers can lock in their pricing at the beginning of tax season, even if TaxAct raises its prices in the interim.

The at-a-glance help feature gives you real-time advice and commentary from tax experts as you work through your tax return. The bookmark feature lets you flag interview questions for review at a later time. And it’s easier than ever to call up prior-year tax returns as you prepare your current-year return.

State Tax Prep Process

Some people are fortunate enough to live in a state with no income tax. The rest of us must prepare and file state income taxes every year. All three programs support that endeavor at roughly equivalent cost.

H&R Block’s State Tax Prep Process

H&R Block’s state preparation process unfolds similarly to the federal return — except with state-specific questions. Once you check your federal return for accuracy, the program immediately whisks you into the state section and automatically imports all relevant information from your federal return.

During the 2014 tax year, when I lived in two states, I found it simple to fill out my second state return. H&R Block remembered I’d moved during the year, and the software automatically brought me back to the beginning of the state return process after completing the first. I haven’t moved since and can’t claim income in any other states, so this hasn’t come up since, but the process appears to work much the same today.

TurboTax’s State Tax Prep Process

As with H&R Block, TurboTax automatically transfers all the information from your federal return to your state return. The process for adding a second state, if necessary, is slightly more cumbersome, as you have to navigate an additional drop-down menu. But that’s a pretty minor issue most taxpayers (being single-state filers) don’t have to worry about.

TaxAct’s State Tax Prep Process

TaxAct’s state return section is similar to the other two services’, with automatically imported information and thorough, state-specific questions. As with the federal return, it’s sometimes too thorough. It starts immediately after you finish your federal return, though you’re free to leave it for later.

Accuracy Check

All three programs include a post-prep accuracy check designed to ensure your return is prepared correctly and you’re not set up to pay more than you should.

H&R Block’s Accuracy Check

Every year, before filing, H&R Block has rechecked my entire return for accuracy. I can view my federal and state returns and specify how I want to pay the tax I owe. When I’m eligible for a refund, which doesn’t happen every year, it asks how I’d like to receive it as well.

The process ends smoothly and takes less time — without being any less thorough — than the other two options.

TurboTax’s Accuracy Check

TurboTax follows your state return by reviewing the entire package for accuracy and assessing your audit risk with a handy thermometer graphic. And TurboTax is nothing if not thorough, presenting each accuracy- or audit-related issue and recommended solution in turn before walking you through how you’d like to pay your taxes or receive your refund. Though this thoroughness does lengthen the process of filing taxes, it’s a trade-off some filers may be willing to make.

TaxAct’s Accuracy Check

Like TurboTax, TaxAct waits until you’ve completed all your returns to review them for accuracy, saving some time. However, the review process is more complicated than TurboTax’s and H&R Block’s, with different alert levels (red, yellow, and green) that identify issues of varying severity. TaxAct uses these alerts to assess your overall audit risk, though it doesn’t display this risk in a handy graphic like TurboTax.

You can also skip the alerts altogether if you’re confident you’ve kept everything aboveboard — a nice perk for seasoned filers. One drawback is that there’s no easy way to run your completed return by a professional tax preparer. Both H&R Block and TurboTax offer that option for an additional fee.

Once you pay for TaxAct’s prep services, the platform asks you how you’d like to receive your refund or make any tax payments you owe, then walks you through how to prepare for next year’s taxes. That includes introducing its Donation Assistant app, which can help you track and quantify noncash charitable donations throughout the year, and DocVault, a secure mobile-friendly storage service for important tax-related documents. Despite these services’ genuine usefulness, this part of the process drags on too long when the end is in sight.

Additional Features & Capabilities

All three platforms have some additional features and capabilities worth noting. These include the ability to pay tax prep fees with your tax refund (if you’re entitled to one), digital self-help resources and tax reference materials, and optional tax audit assistance or defense add-ons.

H&R Block’s Additional Features & Capabilities

H&R Block’s refund bonus and user-friendly online help database set it apart.

  • Refund Bonus. H&R Block is one of the few remaining online tax prep platforms to offer a refund bonus. Despite shrinking from 10% in the early 2010s to 3.5% in 2020, it’s better than nothing — $35 for every $1,000 refunded. You do have to take your refund on an Amazon gift card, which is a drag for people who prefer straight-up debit cards. You can still receive your federal refund on a reloadable prepaid debit card, just without any extra cash. See H&R Block’s refund bonus terms for more information.
  • Pay With Your Refund. You can pay your federal and state tax prep fees with your federal refund for an additional service charge of $39.95 (subject to change).
  • Audit Defense. H&R Block’s Worry-Free Audit Support package is a bargain at about $20 per year. It pairs you with an H&R Block EA to help you interpret and respond to IRS correspondence, prepare for an IRS audit, and deal with the audit itself (with the option for in-person representation if needed).
  • Online Help Resources. H&R Block has an extensive online knowledge base covering a slew of common and not-so-common tax questions as well as H&R Block’s tax prep software itself. The database is searchable and mobile-friendly.

TurboTax’s Additional Features & Capabilities

TurboTax doesn’t have a refund bonus, but its reasonable pay-with-your-refund fees and extensive online help resources shine.

  • Pay With Your Refund. You can pay your TurboTax prep fees with your federal refund for an additional $34.99 processing charge (subject to change and may vary by state). There’s no option to pay with your state refund.
  • Audit Defense. TurboTax offers free basic audit support for all clients. This service extends to interpreting IRS correspondence and preparing a response. For help preparing for an audit and representation during the audit process, you must add TurboTax’s Max package, which costs about $60 and includes audit representation and identity theft monitoring.
  • Online Help Resources. TurboTax has a searchable help database and an extensive knowledge base filled with user-generated questions and answers. It’s immensely useful for the tax-curious, if a bit overwhelming.

TaxAct’s Additional Features & Capabilities

TaxAct doesn’t offer a refund bonus but does have a cheap pay-with-your-refund option and a reasonably priced audit defense add-on.

  • Pay With Your Refund. You can pay your TaxAct tax prep fees with your state or federal refund for a processing fee of about $20 (subject to change).
  • Audit Defense. TaxAct only offers audit defense through its Protection Plus add-on, a third-party package that includes full IRS and state representation in the event of an audit. TaxAct does have a self-service audit assistance portal that helps clients interpret IRS and state tax letters but doesn’t make human employees available for this function.
  • Online Help Resources. TaxAct has an extensive online help database that’s fully searchable and organized by tax year. It’s a helpful resource for clients with questions about prior-year returns or tax topics.

The Verdict: Should You Choose H&R Block, TurboTax, or TaxAct?

None of these tax prep platforms is perfect. Each has its strengths and weaknesses, and you should choose the software you use based on your tax situation and personal preferences.

You Should Use H&R Block If…

H&R Block is relatively easy to use and has moderate pricing and robust customer support. The experience is straightforward, with none of the bugs that plague TurboTax and without the overwhelming detail inherent in TaxAct’s interview process.

However, H&R Block could be a bit more friendly — and a bit more cost-competitive for filers who need some extra help. In general, H&R Block is suitable for people who have some tax filing experience and comfort with the basic contours of the process, including choosing the appropriate filing status and selecting the correct forms.

H&R Block might be the right choice for you if:

  1. You Value Transparent Pricing. H&R Block has transparent pricing. You always know exactly how much you’ll pay to file — and how much you’ll add to the final cost of your return if you need to upgrade to a higher-priced plan.
  2. You Want to Save Time. H&R Block has consistently been the fastest of these tax prep programs, at least for me. It hasn’t won by a mile, but the difference is notable enough to mention. The contrast with TaxAct is particularly acute.
  3. You Want a Refund Bonus. H&R Block continues to offer a refund bonus to filers who consent to transfer their tax refunds to Amazon gift cards. It’s impossible to say how much longer that will continue, but for now, it’s an advantage over TurboTax and TaxAct.
  4. You Need In-Person Support During or After Filing. H&R Block has a network of more than 10,000 branches across the U.S., making it easy to switch from online to in-person preparation if needed. TurboTax and TaxAct can’t say the same. H&R Block also offers free in-person audit assistance for all online filers, a key perk for folks who worry the IRS will audit them.

See our full H&R Block review for a complete analysis.

You Should Use TurboTax If…

TurboTax is significantly more expensive than H&R Block or TaxAct. Though its free plan has grown more robust in the past couple of years, it’s still lacking.

That said, you do get what you pay for: an intuitive interview process, a user-focused (and mobile-friendly) layout, and lots of support. It’s nice to be able to import from so many sources too. So TurboTax is ideal for novice tax filers as well as more experienced filers for whom affordability isn’t a top concern.

TurboTax is the right choice for you if:

  1. You Value User-Friendliness. TurboTax is the most user-friendly of these programs. Its design and aesthetic are intuitive and easy on the eyes, unlike the more cluttered, less intuitive TaxAct. Its questions are both simply worded and logical, whereas H&R Block’s interview questions and explanations can be confusing. And in addition to offering a powerful app, TurboTax’s regular version is very mobile-friendly. That’s good news for taxpayers who prefer to prepare their returns on a tablet.
  2. You Like Impressive Importing Capabilities. TurboTax has long been a leader in prior-year tax return importing. If you can upload your return in PDF format, you can import it to TurboTax without manually reentering information.
  3. You Depend on Good Customer Service and Help Functions. TurboTax has some useful support features, including a customer service hotline with extensive hours and a comprehensive knowledge base. I’ve referred to TurboTax’s knowledge base more times than I can count and have almost always had my questions answered to my satisfaction.

See our full TurboTax review for a complete analysis.

You Should Use TaxAct If…

TaxAct has always been the cheapest option of the three, and its functionality has improved significantly over the years. Now, it’s nearly (but not quite) on par with TurboTax and H&R Block.

That said, my TaxAct return has consistently taken longer than my TurboTax and H&R Block returns. The support infrastructure is unimpressive, though the tax audit defense no longer costs an arm and a leg — just $10 when you upgrade to the premium plan.

But TaxAct is no longer the best game in town for ultra-frugal filers.

In general, TaxAct is ideal for somewhat more experienced filers who don’t mind exchanging time for money. Though its interface has gotten more user-friendly over the years, it’s still not the best software for first-timers.

TaxAct is a solid choice if:

  1. You’re Set on Paying Less. TaxAct is the cheapest of these services. I have a complex tax situation, but I was able to walk away from my most recent filing without spending more than $79.90 (though that would have been $114.90 had I waited until later in the season to file). That’s less than I spent for tax prep with H&R Block and TurboTax. So while TaxAct has grown more expensive in recent years, it’s still the cheapest option among them.
  2. You Want a Price-Lock Guarantee. TaxAct offers a price-lock guarantee to all customers at sign-up. Once you create your account, you’re locked into TaxAct’s pricing at that moment, even if you leave your return for months and TaxAct raises prices during the intervening period. Since tax prep companies frequently raise prices close to the filing deadline, that’s great news for frugal filers. One caveat: TaxAct’s first price-lock step-up happened extremely early in 2020 (for the 2019 tax year), in late January. Another step-up occurred in mid-March. It’s likely the 2020 tax year will play out similarly.
  3. You Crave Useful Apps to Help You Keep Track of Important Forms and Records. TaxAct has useful tools that help you keep track of any necessary documentation you need to complete your return, including receipts, bills, and tax forms. You can add photographic records to a secure, mobile-accessible storage area (DocVault) throughout the year, potentially eliminating the need to file tax-related papers for reference at tax time. You can use a separate app, Donation Assistant, to calculate the fair value of noncash charitable donations, an extremely helpful tool for filers who donate valuable items, such as vehicles and furniture. In the past, I’ve had to scour the Internet for fair-value charts from reputable sources without any clear guarantee they’re accurate.

See our full TaxAct review for a complete analysis.

All Are Great If…

Despite clear differences, all three of these tax prep software programs have some selling points in common. If you have a simple tax situation or don’t want to visit a tax preparer’s office in person but otherwise aren’t too picky about how you get your taxes done, you can’t go wrong here.

Any of these tax prep options are good if:

  1. You Have a Simple Tax Situation. Whatever else you can say about TaxAct, TurboTax, or H&R Block, all three are effective — and dirt cheap if not free — for simple tax situations that don’t require attached schedules.
  2. You Need to Import a Prior-Year Return From Another Tax Prep Program. Although this hasn’t always been the case, all three programs now have robust prior-year return importing tools that make it easy to switch from another provider.
  3. You Don’t Want to Visit a Tax Preparer’s Office or Pay CPA Prices for Tax Prep. With the exception of TurboTax Live Full-Service and H&R Block’s Tax Pro Go, you’ll pay far less to prep your taxes with any of these services than with a full-service human tax preparer. And you won’t have to visit a physical office location, either — unless you’re prepping with H&R Block and decide you’d like to do that before filing.

Final Word

TurboTax, TaxAct, and H&R Block are three of the most popular online tax software options, but they’re not the only ones out there. A bevy of other options exists, from relatively well-known providers like TaxSlayer and eSmart Tax to lesser-known options like Circle CPA and FreeTaxUSA.

And the federal government can help with free tax preparation options thanks to the Free File Alliance (a consortium of about a dozen tax prep companies that offer free filing services to filers who meet certain income and residency criteria) and Free Fillable Forms, which are available to filers regardless of income or residency.

With all these options, depending on your tax situation, you might find one that’s easier, faster, or simply less stressful to use.

And if you don’t want to face a potentially hefty processing charge to pay your tax prep fees with your tax refund but don’t want to pay out of pocket immediately, use a rewards credit card to pick up the tab. If you stay within your card’s spending limit and pay your balance in full by the statement due date, you avoid processing fees and earn a small return on your outlay. Check out our roundups of the best cash-back credit cards and best travel rewards credit cards for ideas.

Source: moneycrashers.com

Posted on February 24, 2021

The 4 Smartest Ways to Cope With a Tax Bill You Can’t Afford

Discovering that you owe the IRS money is never a good feeling. If you’re staring down a tax bill you can’t afford to pay from 2020, you’re no doubt in good company.

Countless people have turned to gig work to survive, which can result in surprise tax bills. Expanded jobless benefits have been a lifeline to millions, but even unemployment benefits are taxable. With confusion about PPP loans, the CARES Act retirement rules and the payroll tax “holiday”, it’s a safe bet that this year’s tax season will be even more migraine-inducing than ever.

4 Smart Strategies for Dealing With a Tax Bill You Can’t Afford

The most important thing to know if you owe: You do have options. But it’s essential that you take action. Here are four mistakes to avoid — and what to do instead.

Mistake #1: You don’t file a tax return because you can’t pay your bill.

The smart strategy: File a return, even if you can’t afford to pay. 

The penalties for not filing a tax return are much tougher than the penalties for not paying on time. Here’s how it works:

  • If you don’t file a tax return: You’ll pay a 5% monthly late fee, up to 25% of the tax bill, plus interest.
  • If you file your tax return on time but don’t pay: Your late fee is just 0.5% per month, also capped at 25% of the bill, plus interest.

Note that filing for a tax extension only gives you more time to file. It doesn’t give you more time to pay taxes if you owe. But if you ask for an extension by April 15 and file your return by the Oct. 15 deadline, you’ll only be paying the lower late payment fee instead of the 5% monthly fee for filing a late return.

When you don’t file a tax return, the IRS can file a substitute return on your behalf. If that happens, you’ll still want to file your own return. The substitute return won’t include tax deductions and tax credits that could potentially lower your bill.

Mistake #2: Using a credit card or cash advance to pay your taxes.

The smart strategy: Apply for an IRS payment plan.

This one’s a head-scratcher because even the IRS suggests paying taxes you can’t afford with a credit card or cash advance. Apparently, the IRS doesn’t realize its own generosity as a creditor.

A much better option is to apply for an IRS installment plan. You’ll still accrue penalties and interest. But when you sign up for an installment plan, the monthly 0.5% late fee drops to 0.25%. With interest, that works out to 6% annually.

By comparison, a typical credit card APR hovers above 16%. Cash advance APRs are a gut-punching 25% on average, plus they often come with additional fees.

Typically, the IRS will automatically approve your agreement if you owe less than $10,000 and you agree to pay off your bill within three years, with no monthly payments required. If you owe more or need more time to pay, the IRS could technically ask for more financial information. But as long as your balance is $50,000 or less, odds are still high that you’ll be automatically approved. The maximum repayment time frame is 72 months, so your monthly payments can be as low as 1/72 of your balance.

Pro Tip

Agree to the lowest monthly payment the IRS will accept and then pay extra each month if you can. 

You’ll pay a $31 fee if you apply online and have money automatically withdrawn from your bank account each month. The fees are higher if you set up the plan by phone, in person or by mail, or if you choose a different payment method. Setup fees can be waived if the IRS considers you low income, which means your income is below 250% of the federal poverty level for your state.

While you’re in a payment plan, any future tax refunds will be applied to your balance until you’ve paid it off. But the IRS won’t take further action, like garnishing your wages or placing a lien on your property, as long as you’re paying as agreed.

Mistake #3: Hiring a tax settlement company.

The smart strategy: Negotiating with the IRS yourself.

If you’re seriously delinquent on taxes, you may need professional help. If you fall in this camp, only an attorney, a CPA or a type of tax adviser called an enrolled agent can represent you before the IRS. But most people who owe taxes won’t need the help of a pro.

Be extremely wary of companies that claim they can stop wage garnishments or settle your debt for a fraction of what you owe. The FTC warns that the vast majority of taxpayers don’t qualify for the programs they’re hawking. Many people who use these companies don’t get tax relief. Instead, they wind up deeper in debt due to high upfront fees and unauthorized charges.

You typically don’t need assistance to set up a payment plan. But even if you can’t afford to start paying your bill or your installment agreement isn’t approved, you do have options for negotiating with the IRS.

One option is to ask for currently not collectible status, which means the IRS will pause collection efforts until your financial situation improves. You’ll still owe taxes, and interest and penalties will continue to accrue. The IRS will require you to show proof of significant hardship and document your income, spending and assets.

Another possibility is an offer in compromise, which allows you to settle your tax debt for less than you owe. You can do this either with a lump-sum payment or with monthly installment payments. The IRS rejects most applications for an offer in compromise. Typically, your tax bill has to be large enough that the IRS agrees it can’t realistically collect what you owe. Use the IRS Offer in Compromise pre-qualifying screener to determine whether this could be an option.

Mistake #4: Taking a 401(k) withdrawal.

The smart solution: If you must touch your retirement money, stick with a 401(k) loan or your Roth IRA contributions.

We’d recommend an installment plan hands-down over touching your retirement money. But if that’s not an option — or if you’re determined to get rid of this tax debt ASAP at any cost — an early 401(k) withdrawal should only be the last option..

With an early 401(k) withdrawal, you’ll be racking up more taxes just to pay your taxes. Your distribution will be taxed as ordinary income, plus you’ll pay a 10% penalty.

A 401(k) loan may be a better option since you won’t be penalized. But it’s still risky. If you left your job for any reason, you’d have to repay the loan in full when you file your tax return the next year. Otherwise, it’s treated as an early withdrawal.

If you’re using retirement money to pay taxes, start with your Roth IRA if you have one. If you can limit your withdrawals to your contributions, you won’t pay taxes or a penalty, since that money has already been taxed.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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Source: thepennyhoarder.com

Posted on February 24, 2021

IRS Extends April 15 and Other Tax Deadlines for Texas Residents

If you live in Texas, you can wait until June 15, 2021, to file your 2020 federal income tax return. The IRS is extending this and other tax deadlines because of the recent winter storms in Texas, which was declared a disaster area by the Federal Emergency Management Agency (FEMA). Taxpayers in other states impacted by the storms that receive similar FEMA disaster declarations will automatically receive the same filing and payment relief.

Various federal tax filing and payment due dates for individuals and businesses from February 11 to June 14 will be shifted to June 15. In addition to the April 15 personal income tax filing deadline, this includes:

  • Various 2020 business returns usually due on March 15;
  • 2020 IRA contributions originally due on April 15;
  • Quarterly estimated income tax payments normally due on April 15;
  • Quarterly payroll and excise tax returns ordinarily due on April 30; and
  • 2020 returns for tax-exempt organizations typically due on May 17.

Penalties on payroll and excise tax deposits due from February 11 to February 25 will also be waived if the deposits are made by February 26.

You don’t have to contact the IRS to get this relief. However, if you receive a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, you should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside Texas, but whose records necessary to meet a deadline occurring during the postponement period are located in Texas. Taxpayers qualifying for relief who live in another state need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2021 return normally filed next year), or the return for the prior year. This means that taxpayers can, if they choose, claim these losses on the 2020 return they are filling out this tax season. Be sure to write the FEMA declaration number (4586) on any return claiming a loss. See IRS Publication 547 for details.

Source: kiplinger.com

Posted on February 24, 2021

8 Steps to Buying a Vacation Home

If you’re like many Americans, you dream of having a beach house, a desert escape, or a mountain hideaway. Perhaps you’re tired of staying at hotels and want the comforts of home at your fingertips.

You’re ready to make this dream a reality. Before you do, consider these steps.

How to Buy a Vacation Home

1. Choose a Home That Fits Your Needs

As you begin your search for a vacation home, carefully consider your goals and needs. Start with the location. Do you prefer an urban or rural area? Lots of property or a townhouse with just a small yard to care for?

Consider what amenities are important to be close to. Where is the nearest grocery store? Is a hospital accessible?

Consider your goals for the property. Is this a place that only you and your family will use? Do you plan to rent it out from time to time? Or maybe you plan to be there only a couple of weeks out of the year, using it as a rental property the rest of the time.

The answers to these questions will have a cascade effect on the other factors you’ll need to consider, from financing to taxes and other costs.

2. Figure Out Financing

Next, consider what kind of mortgage works best for you, if you’re not paying cash. You may want to engage a mortgage broker or direct lender to help with this process.

If you have a primary residence, you may be in the market for a second mortgage. The key question: Are you purchasing a second home or an investment property?

Second home. A second home is one that you, family members, or friends plan to live in for a certain period of time every year and not rent it out. Second-home loans have the same rates as primary residences. The down payment could be as low as 10%, though 20% is typical.

Investment property. If you plan on using your vacation home to generate rental income, expect a down payment of 25% or 30% and a higher rate for a non-owner- occupied loan. If you need the rental income in order to qualify for the additional home purchase, you may need to identify a renter and have a lease. A lender still may only consider a percentage of the rental income toward your qualifying income.

Some people may choose to tap equity in their primary home to buy the vacation home. One popular option is a cash-out refinance, in which you borrow more than you owe on your primary home and take the extra money as cash.

3. Consider Costs

While you consider the goals you’re hoping to accomplish by acquiring a vacation home, try to avoid home buying mistakes.

A mortgage lender can delineate the down payment, monthly mortgage payment, and closing costs. But remember that there are other costs to consider, including maintenance of the home and landscape, utilities, furnishings, insurance, property taxes, and travel to and from the home.

If you’re planning on renting out the house, determine frequency and expected rental income. Be prepared to take a financial hit if you are unable to rent the property out as much as you planned. For a full picture of cost, check out our home affordability calculator.

4. Learn About Taxes

Taxes will be an ongoing consideration if you buy a vacation home.

A second home qualifies for mortgage interest and property tax deductions as long as the home is for personal use. And if you rent out the home for 14 or fewer days during the year, you can pocket the rental income tax-free.

If you rent out the home for more than 14 days, you must report all rental income to the IRS. You also can deduct rental expenses.

The mortgage interest deduction is available on total mortgages up to $750,000. If you already have a mortgage equal to the amount you on primary residence, your second home will not qualify.

The bottom line: Tax rules vary greatly, depending on personal or rental use.

5. Research Alternatives

There are a number of options to owning a vacation home. For example, you may consider buying a home with friends or family members, or purchasing a timeshare. But before you pursue an option, carefully weigh the pros and cons.

If you’re considering purchasing a home with other people, beware the potential challenges. Owning a home together requires a lot of compromise and cooperation.

You also must decide what will happen if one party is having trouble paying the mortgage. Are the others willing to cover it?

In addition to second home and investment properties, you may be tempted by timeshares, vacation clubs, fractional ownership, and condo hotels. Be aware that it may be hard to resell these, and the property may not retain its value over time.

6. Make It Easy to Rent

If you do decide to use your vacation home as a rental property, you have to take other people’s concerns and desires into account. Be sure to consider the factors that will make it easy to rent. A home near tourist hot spots, amenities, and a beach or lake may be more desirable.

Consider, too, factors that will make the house less desirable. Is there planned construction nearby that will make it unpleasant to stay at the house?

How far the house is from your main residence takes on increased significance when you’re a rental property owner. Will you have to engage a property manager to maintain the house and address renters’ concerns? Doing so will increase your costs.

7. Pay Attention to Local Rules

Local laws or homeowners association rules may limit who you can rent to and when.

For example, a homeowners association might limit how often you can rent your vacation home, whether renters can have pets, where they can park, and how much noise they can make.

Be aware that these rules can be put in place after you’ve purchased your vacation home.

8. Tap Local Expertise

It’s a good idea to enlist the help of local real estate agents and lenders.

Vacation homes tend to exist in specialized markets, and these experts can help you navigate local taxes, transaction fees, zoning, and rental ordinances. They can also help you determine the best time to buy a house in the area you’re interested in.

Because they are familiar with the local market and comparable properties, they are also likely to be more comfortable with appraisals, especially in low-population areas where there may be fewer houses to compare.

The Takeaway

Buying a vacation home can be a ticket to relaxation or a rough trip. It’s imperative to know the rules governing a second home vs. a rental property, how to finance a vacation house, tax considerations, and more.

Ready to buy? SoFi offers mortgages for second homes and investment properties, including single-family homes, two-unit buildings, condos, and planned unit developments.

SoFi also offers a cash-out refinance, all at competitive rates.

Got two minutes to spare? That’s how long it takes to check your rate for a mortgage with SoFi.


SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL21004

Source: sofi.com

Posted on February 24, 2021

How to Get Free Tax Filing Through the Free File Alliance

Instead of this straightforward public service, we have the next best thing: A private system that helps the majority of Americans file a federal tax return for free.
Reporter Jessica Huseman pointed out this frustrating truth in a 2017 story for ProPublica, which resurfaces and regains steam each year around tax time — this year with a bump from a replay of her appearance on WNYC’s “On the Media”.
This part is, in fact, easy. Once you know about it.
(BTW, we are happy to tell you all about those free tax filing services.)
Most importantly: Assume you can find a way to file for free. The agreement aims to make free filing available to 70% of Americans, so the odds are in your favor.
The result is that most filers have no idea the option exists, and hardly anyone takes advantage of it.
To qualify, you have to earn below a certain income limit, which changes each year.

The Free File Alliance MUST Let You File Taxes for Free

We just have to make sure we can find it.
Source: thepennyhoarder.com
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“Think about all the things that the IRS already knows about you,” she told OTM.
Filing taxes in the United States could be free and simple for everyone — if only tax prep companies weren’t lobbying to keep it so complicated.
Choose a filing service through the IRS browsing tool. It’ll ask you some questions to help you determine which service is a good fit for your tax situation.
The government has no budget to market it, and the for-profit tax preparers have no incentive to let you know about their free options — and every incentive to funnel you toward a paid option.

How to Get Free Tax Filing Through the Free File Alliance

The problem, predictably, is that no one advertises the free services.
Before you choose a service, read through the requirements for free filing. Some of them cap incomes as low as ,000, or tack on an age requirement or state limitations. A few, but not many, throw in free state filing so you can avoid that surprise charge at the end of the process.
The Free File Alliance is a public-private partnership between a group of tax software companies and the IRS. Nine companies are part of this agreement as of January 2021, according to its recent press release.
The agreement says these companies have to provide the majority of Americans with a free way to prepare and file their taxes online. It also bars the IRS from providing its own free filing system — like that dreamy no-return scenario I mentioned above.
Last year, the Alliance touted “soaring” participation in a press release — a 28% “jump” from 2.3 million filers in 2019 to 2.9 million in 2020. Sounds great, except more than 130 million taxpayers qualified for free filing through the program. That’s a participation rate of less than 2%, exactly where it sat when Huseman called B.S. on the program three years earlier.
Except most of us don’t use it… because we don’t know it exists.
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For tax year 2020 (what you’ll file in 2021), anyone with an adjusted gross income below ,000 qualifies for free filing through an IRS partner.
From your bank and employer, the Internal Revenue Service already gets a lot of the information you painstakingly report on your tax return. We could, in theory, have a return-free system, where the IRS sends you that information and how much it believes you owe, and you don’t have to file anything unless you disagree with it. <!–

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Tax companies will make plenty of offers that tempt you to upgrade to a paid option — or make you believe you have no choice. But you do. They’ve barred our government from offering us that choice, and in return, they’re required to provide it themselves. But we like a challenge, don’t we? Ready to stop worrying about money?


Dana Sitar (@danasitar) has been writing and editing since 2011, covering personal finance, careers and digital media. She was ticked off she didn’t know about the Free File Alliance and wants to make sure you don’t face the same fate.

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