A Roth IRA is a uniquely powerful retirement savings tool, because you won’t pay taxes on the money you withdraw during retirement. An annuity is a way of generating guaranteed income. Put them together, and you have a powerful retirement protection tool that can provide guaranteed income for life, with a big plus: It’s completely tax-free.
Anyone may roll over part or all of an existing Roth to a Roth annuity. You may transfer all or part of the funds in an ordinary Roth to a Roth annuity. While there are income and contribution limits for new money going into a Roth IRA, they don’t apply to rollovers — including rollovers to a Roth annuity.
Different types of annuities accomplish different things and have distinct pros and cons — like the Swiss army knife of personal finance. Since they’re so varied, one type or another can work well for a Roth IRA. Investment choices, fees and contract provisions vary, so work with an annuity agent who will educate you about your choices and clearly lay out the pros and cons.
What kind of annuity works for a Roth? It depends on which stage of your financial life you’re in. In the accumulation stage, you’re building wealth for retirement. In your decumulation stage, you’re retired and receiving income from your savings.
Here’s how Roth annuities can work in each stage.
Building wealth for those approaching retirement
One attractive option is a fixed indexed annuity. With the stock market continuing to break records, it may be vulnerable to a major long-term downturn. When you’re young, you can ride out the ups and downs. But if you’re in your 50s or 60s, you may want to get growth potential without taking the risk of losing Roth money you’ll need during retirement. If so, an indexed annuity might be a good choice for you.
It pays interest based on an underlying market index, such as the S&P 500 or the Dow Jones Industrial Average. While the interest earnings are locked in, up to a stated cap (you may not get all of the upside) each year, you’ll never lose money when the index declines.
While indexed annuities are linked to one or more underlying market indexes, their value does not vary from day to day. Instead, they pay a varying amount of interest that is credited and locked in each year on the anniversary date of the contract. Since equity markets can be volatile, indexed annuities are designed to be held long-term, whether yoked to a Roth IRA or not.
A fixed-rate annuity — also called a multi-year guarantee annuity, or MYGA — is a more conservative choice. It works like a bank CD, paying a set interest rate for a set period. Fixed-rate annuities these days pay much more than CDs of the same term. As of April 2021, you can earn up to 2.90% a year on a five-year fixed-rate annuity and up to 2.25% on a three-year contract, according to AnnuityAdvantage’s online rate database. The top rate for a five-year CD is 1.25% and 1.05% for a three-year CD, according to Bankrate.
Fixed-rate annuities can play a key role in asset allocation. Let’s say you decide to split your Roth assets up 50-50 between equities and fixed income. A fixed-rate annuity can give you a much higher rate of interest than you’d get today with safe fixed-income alternatives, such as CDs and Treasury bonds.
For current annuity rates, see this online annuity database. Interest is paid and compounded annually.
How to get tax-free lifetime income during retirement
Other than a traditional employer pension or Social Security, an income annuity is about the only vehicle that can guarantee an income for as long as you live. And by combining an income annuity with a Roth, that income is tax-free.
If you need income from your Roth very soon, consider an immediate income annuity. You can open a Roth annuity with a single payment (such as a tax-free rollover from an existing Roth IRA) to an insurance company. The insurer in turn guarantees you a stream of income. You can choose how long the payments will last — for instance, 15 years. Most people, however, choose lifetime payments as “longevity insurance.”
You can receive your first monthly income payment a month after your annuity contract is issued.
If you’re married, consider the joint-income option. With it, your spouse will receive regular monthly income payments for the remainder of his or her life too. Payments to a surviving spouse are always tax-free.
If you don’t need income right now, consider a deferred income annuity. Here, your income stream will begin at a future date you choose. By deferring payments, you let the insurer credit more interest over the years on your behalf, and you’ll ultimately get more monthly income. For instance, by delaying lifetime annuity payments from age 65 to 75, you’ll get about 85% to 90% more each month. On the other hand, you and/or your spouse won’t receive the deferred payments as long.
Another option is an indexed annuity with an income rider. The rider guarantees a certain income regardless of the performance of the annuity. It provides income like a deferred income annuity, plus the potential upside of an indexed annuity. It’s sometimes called a “hybrid” annuity.
The downside is cost. The rider typically costs about 1% of the annuity value annually. The insurer deducts this amount from your policy.
The advantage is retaining your money. Unlike an income annuity, which typically has no cash surrender value, an indexed annuity with an income rider lets you keep your money while guaranteeing lifetime income, starting on a date you choose. You thus have flexibility. If you need the money, it will be there for you to withdraw or annuitize. (Wait until the surrender period is over to avoid any penalties.) If you don’t need the money, you can pass on any remaining value to your heirs.
Is the extra cost worth it? It all depends on your situation and goals and your desire to leave money to your heirs.
Whether you’re saving for future retirement or are currently retired or soon will be, annuities offer a range of often-overlooked strategies for the Roth IRA and amplify its advantage of tax-free retirement income.
A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
CEO / Founder, AnnuityAdvantage
Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities.
The sign just went up next door. How does your neighbor’s impending sale affect you?
Most people think their real estate concerns end once they’ve closed on and moved into their new homes. But when a neighbor’s house goes on the market, there can be some important implications for you.
Here are some tips for staying real estate aware.
1. Document important disclosure items
For the most part, good fences make good neighbors. But sometimes the folks on the other side of the fence don’t cooperate, and unresolved neighbor conflicts tend to arise when one of the homes goes on the market.
Have a property line dispute? Or an issue with a broken fence and you want the new buyer to know about it? While sellers in most states have a duty to disclose issues to potential buyers, not all areas require this.
Do your new neighbor-to-be a favor and alert the seller’s agent to anything the buyer needs to know about your neighbor’s property.
2. See things differently
Open houses allow buyers to spend some time exploring a home, but these events also present you with a chance to see your home from your neighbor’s perspective.
Once at a busy open house in San Francisco’s Noe Valley neighborhood, an open house visitor made a somewhat obvious beeline for the back of the house. He immediately got on the phone and started talking with someone about where he was standing, giving orders to move left and right.
It turned out this visitor lived in the home behind, and he was checking to see the neighbor’s view into his home.
The open house is your chance to check your home’s paint job from the neighbor’s yard or simply to see your home from a different perspective.
3. Know and learn the market in real time
Typical sellers claim and save their home online, but they also keep searches going after the fact. Why? To keep tabs on the market, see the comps and have a real-time sense of what’s happening nearby.
Just like when you were a buyer, knowing about the area and types of homes in the market is a good move for any homeowner. Take a neighboring home for sale as an opportunity to see what the market bears. You can also learn about the latest trends in home design.
Speaking to a real estate agent can keep you informed of changes to property taxes or how assessments are changing in your town. A smart real estate agent, working their listing, will be an incredible resource to would-be clients down the road. Leverage their experience when your neighbor sells.
Take note when your neighbor goes to sell their home. It’s not just a time to nose around, but to document, inspect or learn from the home sale. Some homes get listed once in a lifetime — take advantage of the opportunity.
Related:
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
Having a few items on your credit report dragging down your score can be incredibly frustrating, especially if you have a good financial record.
A derogatory mark is a negative item on your credit report that can be fixed by removing it or building positive credit activity. Because derogatory marks can stay on your credit report typically for seven to ten years, it’s important to know how to fix them.
Derogatory marks can affect your credit score, your ability to be approved for credit and the interest rates a lender offers you. Some derogatory marks are due to poor credit activity, such as a late payment. Or it could be an error that shouldn’t be on your report at all.
Types of negative items include late payments (30, 60, and 90 days), charge-offs, collections, foreclosures, repossessions, judgments, liens, and bankruptcies. We’ll cover what each one of these means, and how they can impact your credit reports.
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How do derogatory marks impact my credit score?
The amount that derogatory marks lower your credit score depends on the mark’s severity and how high your credit score was before the mark. For instance, bankruptcy has a greater impact on your credit score than a missed payment or debt settlement. And, unfortunately, having a derogatory mark impacts a high credit score more than it does a low credit score.
According to CreditCards.com and CNNMoney, even a single negative on your credit could cost you over 100 points. Negative items on your credit could cost you thousands of dollars in higher interest rates, or you could be denied altogether.
How long a derogatory mark stays on your credit report depends on the type of mark.
How long do derogatory marks stay on my credit report?
Derogatory marks usually stay on your credit report for around seven to ten years, depending on the type. After that period passes, the mark will roll off your report and you should start seeing a change in your credit score.
Here’s how long each derogatory mark stays on your credit report:
Type of derogatory mark
What is it?
How long does this stay on a credit report?
Late payment
Late payments are payments made 30 days or more after the payment due date.
Typically, this can remain on your report for seven years from the date you made a late payment.
An account in collections or a charge-off
Creditors send your account to collections or charge them off if there’s been no payment for 180 days.
Typically, this can remain on your report for seven years from the date you made a late payment.
Tax lien
A tax lien is when the government claims you’ve neglected or failed to pay taxes on your property or financial assets.
Unpaid tax lien: Can remain on your report indefinitely.
Paid tax lien: Can remain on your report seven years from the date the lien was filed.
Civil judgment
Civil judgments are a debt you owe through the court, such as if your landlord sued you over missed rent payments.
Unpaid civil judgment: Can remain on your report for seven years from when the judgment was filed, but can be renewed if left unpaid.
Paid civil judgment: Can remain on your report for seven years from when the judgment was filed.
Debt settlement
Debt settlement is when you and your creditor agree that you will pay less than the full amount owed.
A typical time period is seven years, starting from when the debt was settled or the date of the first delinquent payment if there were missed payments.
Foreclosure
Foreclosure is when you fail to pay your mortgage and you forfeit the right to the property.
Typically, seven years from the foreclosure filing date.
Bankruptcy
Bankruptcy is a court proceeding to discharge your debt and sell your assets.
Can remain on your report for seven years for Chapter 13 bankruptcy. Chapter 7 bankruptcy can remain on your report for 10 years.
Repossession
A repossession is when your assets are seized, such as a vehicle that was used as collateral.
Can remain on your report for seven years from the first date of the missed payment.
Types of derogatory marks
Late payments
Late payments occur when you’ve been 30, 60, or 90 days late paying an account. Although you don’t want late payments on your credit reports, an occasional 30 or 60-day late payment isn’t too severe. But you don’t want frequent late payments and you don’t want late payments on every single account. One recent late payment on a single account can lower a score by 15 to 40 points, and missing one payment cycle for all accounts in the same month can cause a score to tank by 150 points or more.
Payments 90 days late or more start to factor more heavily into your credit score, and consecutive late payments are even more harmful to your score, as each subsequent late payment is weighted more heavily. Sometimes, creditors will report payments as late as 120 days, which can be almost as severe as charge-offs and collections. Late payments can be reported to the credit bureaus once you have been more than 30 days late on an account and these late payments can stay on your credit reports for up to seven years.
Charge offs
A charge off is when a creditor writes off your unpaid debt. Typically, this occurs when you have been 180 days late on an account. Charge offs have a severely negative impact on your credit, and like most other negative items can stay on your credit reports for seven years. When an account is charged off, your creditor can sell it to collection agencies, which is even worse news for your credit.
Creditors see a charge off as a glaring indication that you have not been responsible with your finances in the past and cannot be counted on to fulfill your financial obligations in the future. When creditors see a charge off on your credit reports, they are more likely to deny any new applications for loans or lines of credit because they see you as a financial risk. If you do qualify, this can mean higher interest rates. Current creditors can respond by raising your interest rates on your existing balances.
Tax liens
In most cases, liens are the result of unpaid taxes – whether it’s at the state or the federal level. For a federal tax lien, the IRS can place a lien against your property to cover the cost of unpaid taxes. Tax liens can make it difficult to get approved for new lines of credit or loans because the government has claimed to your property. What this means is that if you default on any other accounts, your creditors have to stand in line behind the IRS to collect.
Unpaid liens can stay indefinitely on your credit reports. Once they have been paid, however, they can stay on your reports for up to seven years. Like judgments though, the credit bureaus are strictly regulated on how they can report liens because they are also public records.
Civil judgments
Judgments are public records that are also referred to as civil claims. A judgment can be taken out against a debtor for an unpaid balance. A creditor or collection agency can file a suit in court. If the court rules in favor of the creditor, a judgment is taken out against the debtor and put on their credit reports. This, like many other negative items, has a severely negative impact, and like most other negative items can be reported for seven years.
Judgments are also another indication that a person won’t pay their debts. Lawsuits are time-consuming and costly, so they are something that creditors potentially want to avoid. When a judgment is filed though, it can impact more than credit. The judge may allow the creditor to garnish a debtor’s wages, which can heavily impact finances.
Collections
Collections are the most common types of accounts on credit reports. About one-third of Americans with credit reports have at least one collection account. Over half of these accounts are due to medical bills, but other accounts like unpaid credit cards and loans, utilities, and parking tickets can be sold to collections.
Collections arise from debts that are sold to third parties by the original creditor if a bill goes unpaid for too long. They have a severe negative impact on your credit and can stay on your reports for up to seven years. When potential creditors see collections on your credit reports, it can raise flags and cause them to think that you won’t pay your debts.
Foreclosures
A foreclosure is a legal proceeding that is initiated by a mortgage lender when a homeowner has been unable to make payments. Usually, a lender will file a foreclosure when a homeowner has been three months late or more on mortgage payments.
When a lender decides to foreclose, they begin by filing a Notice of Default with the County Recorder’s Office, which begins the legal proceedings. If a foreclosure goes through and a homeowner can’t catch up on payments, then they are evicted from their home, and the foreclosure is reported to the credit bureaus.
Bankruptcies
Bankruptcy is extremely damaging to credit. Individuals who file for bankruptcy are those who have too much debt, and not enough money to pay it. They likely have had overdue accounts for a long period of time and in some cases loss of income that prevents them from being able to pay any of their bills. Bankruptcies can also arise from huge medical debt.
Whether or not file for bankruptcy is a difficult decision, and doing so can impact your credit from seven to ten years, depending on the type of bankruptcy you file. When a bankruptcy is filed, debts are discharged and the individuals filing are released from most of their previously incurred debts (there are some exceptions). This option can give people a “clean slate” from debt, but creditors don’t like to see it on credit reports because it can imply that an individual won’t pay their debts.
Repossessions
A repossession is a loss of property on a secured loan. Secured loans are where you have collateral, like a car or a house, and the loss occurs when the lender takes back the property because of the inability to pay. Usually, when this occurs, the lender will auction off the collateral to make up for the remaining balance, although it doesn’t usually cover the remaining balance.
When there is a remaining balance, the creditor may choose to sell it off to collections. A repossession has a severe negative impact on credit because it shows a debtor’s inability to pay back a loan. Usually, a repossession follows a long line of late payments and can knock a lot of points off a credit score.
How can I improve my credit score with derogatory marks on my credit report?
If you have derogatory marks, you can improve your credit score by working to rebuild your credit. By boosting your credit score, you’re more likely to get approved for loans and credit cards.
Here’s how to improve your credit score based on the type of derogatory mark:
Derogatory mark
What to do to improve your credit score
Late payments
Pay off the full debt as soon as possible. If there are late fees, ask the creditor to drop the fee (they often do if it’s your first time being late). Stay on top of your payments with other lenders to show that you’re responsible, reducing the impact of a late payment.
An account in collections or a charge-off
Pay off the debt or negotiate a settlement where you pay less than the full amount owed. Making a payment doesn’t remove the negative mark from your report, but prevents you from being sued over the debt.
Tax lien
Pay the taxes you owe in full as soon as possible. Continue to make timely payments with any creditors and lenders.
Civil judgment
Pay off the judgment amount, ideally before it gets to court. Make other payments on time to limit the impact of the civil judgment on your credit score.
Debt settlement
Pay the full settled amount to prevent your account from going to collections or being charged off.
Foreclosure
Keep other credit and loans open and make timely payments to build up positive credit activity.
Bankruptcy
Rebuild your credit after bankruptcy with credit cards that cater to lower credit and credit builder loans. Make timely payments to reestablish that you’re a responsible borrower.
Repossessions
Continue to pay other bills on time and pay off any further debt to the creditor.
You can also remove derogatory marks if they’re inaccurate or unfairly reported. By requesting your free credit report, you can look for mistakes and inaccuracies.
For example, check to see if a missed payment was inaccurately reported or if someone else’s account got mixed up with yours. You can remove these mistakes, giving your credit score a boost.
How do I remove derogatory marks from my credit report?
You can remove derogatory marks from your credit report by disputing inaccuracies with the credit bureaus. Here’s how:
1. Request and review your credit report
TransUnion, Equifax and Experian provide one free credit report each year. Request your credit report and review it closely for errors.
Look through both “closed” and “open” derogatory marks. Check to see if your personal information is correct and if the creditor reported payments and dates appropriately. Take note of any discrepancies.
2. Dispute derogatory marks
If you notice incorrect items, payments or dates you need to file a dispute with that credit bureau (and any bureau that lists the item on your report).
You can file a dispute through the credit bureau or have a professional assist you. It’s best to make disputes as soon as you notice them, ideally within 30 days of the incident. The credit bureaus must respond to you within 30-45 days.
3. Follow up on the dispute
You may have to provide more information or proof to refute something on your credit report. Be sure to respond to any inquiries by the specified time. Check your credit report afterward to make sure that the error is removed.
Removing a derogatory mark from your credit report helps to repair your credit. You’ll also want to improve your credit by doing things like lowering your credit utilization rate, upping the average age of your credit and making timely payments.
If you’re unable to remove a derogatory mark from your credit report, you’ll need to wait until it rolls off of your report, usually within seven to 10 years. In the meantime, work to rebuild your credit and improve your creditworthiness.
How can I get help with derogatory marks?
You can remove derogatory marks from your credit report by yourself. However, getting help from a credit repair company can make the process easier and improve your chances of getting the negative mark removed.
Many consumers appreciate professional help as it saves time, energy and resources. Contact us for a free credit report consultation. We’ll talk about your unique situation and the ways that we can help you.
Bankruptcy offers a way out of debt by either eliminating it or repaying part of it. The decision on whether or not to file for bankruptcy is however not an easy one. You may end up losing most of your assets or none at all. At the same time some debts are not covered by bankruptcy. To help you in making the right decision let’s look at how bankruptcy works and when it’s a good idea to file for one.
Which Debts are Discharged by Bankruptcy?
Before filing you have to decide on the type of personal bankruptcy that is unique to you financial situation. The process covers consumer debts such as credit cards, personal loans, mortgages and medical debts. Non consumer debts cannot be forgiven through personal bankruptcy. These include alimony, taxes, child support, and criminal restitutions.
It’s advisable to have a bankruptcy attorney go through your finances to ascertain which debts qualify as consumer debts and which ones do not. For example, a student loan can be either depending on how it was used.
Types of Personal Bankruptcies
In the United States a person can file for either one of the following personal bankruptcies;
Chapter 7 is also known as liquidation bankruptcy. It involves sale of assets that are not protected by bankruptcy and the distributions of the proceeds to creditors. The proceeds can cover your debts in as little as 3 months. Chapter 7 bankruptcy will be ideal if you don’t have a lot of assets that need protection.
Chapter 13 is also referred to as a debt repayment or reorganization. It’s ideal for debtors who have many or valuable assets and don’t want to lose them. Basically the debtor tables a proposal that shows how he/she plans to clear amounts owed within a given time frame. One gets the chance to clear all debts either partially or in full. You can also have others dismissed entirely.
Your attorney does a “means test” to determine which bankruptcy you are eligible for. In a nutshell, you may not be eligible for Chapter 7 if it’s evident that your income can settle debts under Chapter 13. Similarly, a Chapter 13 bankruptcy may be denied if your debts are too high in comparison to your income.
When is Bankruptcy a Good Idea
Being eligible for bankruptcy doesn’t necessarily mean that you need to file for one. It could be that all you need is a little professional advice on how to manage your finances.
You also have to contend with the fact that bankruptcy stays on your credit report for seven to ten years. That said, there are some circumstances that call for bankruptcy;
#1 When debt management programs don’t work
Credit counseling is a service offered by most financial advisors and organizations. You may be advised on how to reduce personal expenses in order to free more of your income to clear debts. Other measures include renegotiating terms with credit companies or other creditors.
When debt management fails, whether it’s due to non commitment on your part or refusal by creditors, then bankruptcy could be your only way out.
#2 When you are being sued
A lawsuit filed by creditors can be tricky when you have no means of repaying and remaining liquid. The judgment could lead to sale of assets or foreclosure on your properties. When faced with such eventualities, filing for bankruptcy could be the only way for you to remain afloat. The process offers you the chance to retain some of your property that would otherwise be auctioned.
#3 When faced with overwhelming medical bills
Most financial woes result from making wrong decisions on investments and credit lines. You may however find yourself faced with bills that are not of your own making. Such include medical bills that are not covered by insurance and are beyond your financial reach. In such circumstances, filing for bankruptcy is advisable; the bill will be discharged without over-tasking your income or your family’s finances.
#4 Insolvency Due to Industry Crisis
More often than not you will find yourself contemplating mortgage as an investment. When the industry is in a boom, then you are all set to make a profit on resale in the foreseeable future; that is however not always the case. Upward adjustments on mortgage repayments can leave you deep in debt. Filing for bankruptcy could be the only way of salvaging your property from mortgage lenders.
The take away
Bankruptcy is a federal court-protected financial tool that gives you a “fresh start” from debt burden. The process becomes part of your credit report for 7-10 years. It can also lead to loss of assets hence should be done as a final result. If you are facing foreclosure, hefty medical bills or a creditor’s lawsuit then filing for bankruptcy could be your only way out. The above information gives you an overview on how to go about it.
Having a few items on your credit report dragging down your score can be incredibly frustrating, especially if you have a good financial record.
A derogatory mark is a negative item on your credit report that can be fixed by removing it or building positive credit activity. Because derogatory marks can stay on your credit report typically for seven to ten years, it’s important to know how to fix them.
Derogatory marks can affect your credit score, your ability to be approved for credit and the interest rates a lender offers you. Some derogatory marks are due to poor credit activity, such as a late payment. Or it could be an error that shouldn’t be on your report at all.
Types of negative items include late payments (30, 60, and 90 days), charge-offs, collections, foreclosures, repossessions, judgments, liens, and bankruptcies. We’ll cover what each one of these means, and how they can impact your credit reports.
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How do derogatory marks impact my credit score?
The amount that derogatory marks lower your credit score depends on the mark’s severity and how high your credit score was before the mark. For instance, bankruptcy has a greater impact on your credit score than a missed payment or debt settlement. And, unfortunately, having a derogatory mark impacts a high credit score more than it does a low credit score.
According to CreditCards.com and CNNMoney, even a single negative on your credit could cost you over 100 points. Negative items on your credit could cost you thousands of dollars in higher interest rates, or you could be denied altogether.
How long a derogatory mark stays on your credit report depends on the type of mark.
How long do derogatory marks stay on my credit report?
Derogatory marks usually stay on your credit report for around seven to ten years, depending on the type. After that period passes, the mark will roll off your report and you should start seeing a change in your credit score.
Here’s how long each derogatory mark stays on your credit report:
Type of derogatory mark
What is it?
How long does this stay on a credit report?
Late payment
Late payments are payments made 30 days or more after the payment due date.
Typically, this can remain on your report for seven years from the date you made a late payment.
An account in collections or a charge-off
Creditors send your account to collections or charge them off if there’s been no payment for 180 days.
Typically, this can remain on your report for seven years from the date you made a late payment.
Tax lien
A tax lien is when the government claims you’ve neglected or failed to pay taxes on your property or financial assets.
Unpaid tax lien: Can remain on your report indefinitely.
Paid tax lien: Can remain on your report seven years from the date the lien was filed.
Civil judgment
Civil judgments are a debt you owe through the court, such as if your landlord sued you over missed rent payments.
Unpaid civil judgment: Can remain on your report for seven years from when the judgment was filed, but can be renewed if left unpaid.
Paid civil judgment: Can remain on your report for seven years from when the judgment was filed.
Debt settlement
Debt settlement is when you and your creditor agree that you will pay less than the full amount owed.
A typical time period is seven years, starting from when the debt was settled or the date of the first delinquent payment if there were missed payments.
Foreclosure
Foreclosure is when you fail to pay your mortgage and you forfeit the right to the property.
Typically, seven years from the foreclosure filing date.
Bankruptcy
Bankruptcy is a court proceeding to discharge your debt and sell your assets.
Can remain on your report for seven years for Chapter 13 bankruptcy. Chapter 7 bankruptcy can remain on your report for 10 years.
Repossession
A repossession is when your assets are seized, such as a vehicle that was used as collateral.
Can remain on your report for seven years from the first date of the missed payment.
Types of derogatory marks
Late payments
Late payments occur when you’ve been 30, 60, or 90 days late paying an account. Although you don’t want late payments on your credit reports, an occasional 30 or 60-day late payment isn’t too severe. But you don’t want frequent late payments and you don’t want late payments on every single account. One recent late payment on a single account can lower a score by 15 to 40 points, and missing one payment cycle for all accounts in the same month can cause a score to tank by 150 points or more.
Payments 90 days late or more start to factor more heavily into your credit score, and consecutive late payments are even more harmful to your score, as each subsequent late payment is weighted more heavily. Sometimes, creditors will report payments as late as 120 days, which can be almost as severe as charge-offs and collections. Late payments can be reported to the credit bureaus once you have been more than 30 days late on an account and these late payments can stay on your credit reports for up to seven years.
Charge offs
A charge off is when a creditor writes off your unpaid debt. Typically, this occurs when you have been 180 days late on an account. Charge offs have a severely negative impact on your credit, and like most other negative items can stay on your credit reports for seven years. When an account is charged off, your creditor can sell it to collection agencies, which is even worse news for your credit.
Creditors see a charge off as a glaring indication that you have not been responsible with your finances in the past and cannot be counted on to fulfill your financial obligations in the future. When creditors see a charge off on your credit reports, they are more likely to deny any new applications for loans or lines of credit because they see you as a financial risk. If you do qualify, this can mean higher interest rates. Current creditors can respond by raising your interest rates on your existing balances.
Tax liens
In most cases, liens are the result of unpaid taxes – whether it’s at the state or the federal level. For a federal tax lien, the IRS can place a lien against your property to cover the cost of unpaid taxes. Tax liens can make it difficult to get approved for new lines of credit or loans because the government has claimed to your property. What this means is that if you default on any other accounts, your creditors have to stand in line behind the IRS to collect.
Unpaid liens can stay indefinitely on your credit reports. Once they have been paid, however, they can stay on your reports for up to seven years. Like judgments though, the credit bureaus are strictly regulated on how they can report liens because they are also public records.
Civil judgments
Judgments are public records that are also referred to as civil claims. A judgment can be taken out against a debtor for an unpaid balance. A creditor or collection agency can file a suit in court. If the court rules in favor of the creditor, a judgment is taken out against the debtor and put on their credit reports. This, like many other negative items, has a severely negative impact, and like most other negative items can be reported for seven years.
Judgments are also another indication that a person won’t pay their debts. Lawsuits are time-consuming and costly, so they are something that creditors potentially want to avoid. When a judgment is filed though, it can impact more than credit. The judge may allow the creditor to garnish a debtor’s wages, which can heavily impact finances.
Collections
Collections are the most common types of accounts on credit reports. About one-third of Americans with credit reports have at least one collection account. Over half of these accounts are due to medical bills, but other accounts like unpaid credit cards and loans, utilities, and parking tickets can be sold to collections.
Collections arise from debts that are sold to third parties by the original creditor if a bill goes unpaid for too long. They have a severe negative impact on your credit and can stay on your reports for up to seven years. When potential creditors see collections on your credit reports, it can raise flags and cause them to think that you won’t pay your debts.
Foreclosures
A foreclosure is a legal proceeding that is initiated by a mortgage lender when a homeowner has been unable to make payments. Usually, a lender will file a foreclosure when a homeowner has been three months late or more on mortgage payments.
When a lender decides to foreclose, they begin by filing a Notice of Default with the County Recorder’s Office, which begins the legal proceedings. If a foreclosure goes through and a homeowner can’t catch up on payments, then they are evicted from their home, and the foreclosure is reported to the credit bureaus.
Bankruptcies
Bankruptcy is extremely damaging to credit. Individuals who file for bankruptcy are those who have too much debt, and not enough money to pay it. They likely have had overdue accounts for a long period of time and in some cases loss of income that prevents them from being able to pay any of their bills. Bankruptcies can also arise from huge medical debt.
Whether or not file for bankruptcy is a difficult decision, and doing so can impact your credit from seven to ten years, depending on the type of bankruptcy you file. When a bankruptcy is filed, debts are discharged and the individuals filing are released from most of their previously incurred debts (there are some exceptions). This option can give people a “clean slate” from debt, but creditors don’t like to see it on credit reports because it can imply that an individual won’t pay their debts.
Repossessions
A repossession is a loss of property on a secured loan. Secured loans are where you have collateral, like a car or a house, and the loss occurs when the lender takes back the property because of the inability to pay. Usually, when this occurs, the lender will auction off the collateral to make up for the remaining balance, although it doesn’t usually cover the remaining balance.
When there is a remaining balance, the creditor may choose to sell it off to collections. A repossession has a severe negative impact on credit because it shows a debtor’s inability to pay back a loan. Usually, a repossession follows a long line of late payments and can knock a lot of points off a credit score.
How can I improve my credit score with derogatory marks on my credit report?
If you have derogatory marks, you can improve your credit score by working to rebuild your credit. By boosting your credit score, you’re more likely to get approved for loans and credit cards.
Here’s how to improve your credit score based on the type of derogatory mark:
Derogatory mark
What to do to improve your credit score
Late payments
Pay off the full debt as soon as possible. If there are late fees, ask the creditor to drop the fee (they often do if it’s your first time being late). Stay on top of your payments with other lenders to show that you’re responsible, reducing the impact of a late payment.
An account in collections or a charge-off
Pay off the debt or negotiate a settlement where you pay less than the full amount owed. Making a payment doesn’t remove the negative mark from your report, but prevents you from being sued over the debt.
Tax lien
Pay the taxes you owe in full as soon as possible. Continue to make timely payments with any creditors and lenders.
Civil judgment
Pay off the judgment amount, ideally before it gets to court. Make other payments on time to limit the impact of the civil judgment on your credit score.
Debt settlement
Pay the full settled amount to prevent your account from going to collections or being charged off.
Foreclosure
Keep other credit and loans open and make timely payments to build up positive credit activity.
Bankruptcy
Rebuild your credit after bankruptcy with credit cards that cater to lower credit and credit builder loans. Make timely payments to reestablish that you’re a responsible borrower.
Repossessions
Continue to pay other bills on time and pay off any further debt to the creditor.
You can also remove derogatory marks if they’re inaccurate or unfairly reported. By requesting your free credit report, you can look for mistakes and inaccuracies.
For example, check to see if a missed payment was inaccurately reported or if someone else’s account got mixed up with yours. You can remove these mistakes, giving your credit score a boost.
How do I remove derogatory marks from my credit report?
You can remove derogatory marks from your credit report by disputing inaccuracies with the credit bureaus. Here’s how:
1. Request and review your credit report
TransUnion, Equifax and Experian provide one free credit report each year. Request your credit report and review it closely for errors.
Look through both “closed” and “open” derogatory marks. Check to see if your personal information is correct and if the creditor reported payments and dates appropriately. Take note of any discrepancies.
2. Dispute derogatory marks
If you notice incorrect items, payments or dates you need to file a dispute with that credit bureau (and any bureau that lists the item on your report).
You can file a dispute through the credit bureau or have a professional assist you. It’s best to make disputes as soon as you notice them, ideally within 30 days of the incident. The credit bureaus must respond to you within 30-45 days.
3. Follow up on the dispute
You may have to provide more information or proof to refute something on your credit report. Be sure to respond to any inquiries by the specified time. Check your credit report afterward to make sure that the error is removed.
Removing a derogatory mark from your credit report helps to repair your credit. You’ll also want to improve your credit by doing things like lowering your credit utilization rate, upping the average age of your credit and making timely payments.
If you’re unable to remove a derogatory mark from your credit report, you’ll need to wait until it rolls off of your report, usually within seven to 10 years. In the meantime, work to rebuild your credit and improve your creditworthiness.
How can I get help with derogatory marks?
You can remove derogatory marks from your credit report by yourself. However, getting help from a credit repair company can make the process easier and improve your chances of getting the negative mark removed.
Many consumers appreciate professional help as it saves time, energy and resources. Contact us for a free credit report consultation. We’ll talk about your unique situation and the ways that we can help you.
The IRS started sending third stimulus check payments in batches shortly after President Biden signed the American Rescue Plan Act on March 11. And, so far, the tax agency has sent over 150 million payments. But many Americans — especially those who haven’t received a check yet — still have a lot of questions about the third-round stimulus checks. At the top of the list: How much will I get? And when will I get it?
Fortunately, we have answers to these and other frequently asked questions about your third stimulus check. We also have a nifty Third Stimulus Check Calculator that tells you how much money you should get (everyone’s payment will be different). Read on to get the answers you need to the questions you have. Once you know more about your third stimulus check, you can start figuring out how you can use the money to your advantage.
(Stay on top of all the new stimulus bill developments – Sign up for the Kiplinger Today E-Newsletter. It’s FREE!)
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Number of Third Stimulus Checks
Question: How many third-round stimulus checks will I get?
Answer: As with the first two round of checks, the legislation authorizing the third round of payments only calls for one payment. This is not a “recurring” payment situation.
However, some people will receive a supplemental payment if their 2020 tax return is filed and/or processed after the IRS sends them their regular third stimulus check. The IRS is calling these “plus-up” payments, and they’ll only be sent if your regular stimulus check would have been higher if it was based on your 2020 tax return (instead of on your 2019 return or some other information obtained by the tax agency). So, for example, if you received a $700 third stimulus check based on the information found on your 2019 return, filed your 2020 tax return later, and your third stimulus check would have been for $800 if it was based on information from your 2020 return, then the IRS will send you a second payment for the $100 difference.
Some married couples could also get two payments. If a joint tax return is filed, a married couple could get two separate third stimulus payments. Half may come as a direct deposit and the other half will be mailed to the address the IRS has on file. Each spouse should check the IRS’s “Get My Payment” tool separately using their own Social Security number to see the status of their payments.
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Amount of Third Stimulus Checks
Question: How much money will I get?
Answer: Everyone wants to know how much money they will get. You probably heard that your third stimulus check will be for $1,400 — but it’s not that simple. That’s just the base amount. Your check could actually be much higher or lower.
To calculate the amount of your check, Uncle Sam will start with that $1,400 figure. If you’re married and file a joint tax return, then both you and your spouse will get $1,400 (for a total of $2,800). If you have dependents, you get an additional $1,400 for of them. So, for example, a married couple with two children can get up to $5,600.
Now the bad news. Stimulus payment amounts will be phased-out for people at certain income levels. Your check will be gradually reduced to zero if you’re single with an adjusted gross income (AGI) above $75,000. If you’re married and file a joint tax return, the amount of your stimulus check will drop if your AGI exceeds $150,000. If you claim the head-of-household filing status on your tax return, your payment will be reduced if your AGI tops $112,500. You won’t get any payment at all if your AGI is above $80,000 (singles), $120,000 (head-of-household), or $160,000 (joint filers).
Also note that the IRS, which is issuing the payments, will look at either your 2019 or 2020 tax return for your filing status, AGI, and information about your dependents. Because of this, the amount of your third stimulus check could depending on when you file your 2020 tax return.
If your 2020 tax return isn’t filed and processed by the time the IRS starts processing your third stimulus check, it will use your 2019 tax return to get the necessary information. If your 2020 return is already filed and processed, then your stimulus check will be based on that return. However, as noted earlier, if your 2020 return is not filed and/or processed until after the IRS sends you a stimulus check, but before August 16, 2021 (or September 1 if the May 17 filing deadline is pushed back any further), the IRS will send you a supplemental “plus-up” payment for the difference between what your payment should have been if based on your 2020 return and any payment actually sent based on your 2019 return.
Again, we have an easy-to-use Third Stimulus Check Calculator to help you figure out the estimated amount of your check (based on your 2019 or 2020 return). Check it out!
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Taxation of Third Stimulus Checks
Question: Will my third stimulus check be taxed later?
Answer: No. As with the first two rounds of payments, your third stimulus check is actually just an advanced payment of the Recovery Rebate tax credit for the 2021 tax year. As such, it won’t be included in your taxable income.
You also won’t be required to repay any stimulus check payment when filing your 2021 tax return — even if your third stimulus check is greater than your 2021 credit. If your third stimulus check is less than your 2021 credit, you’ll get the difference when you file your 2021 return next year. So, it’s a win-win situation for you!
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Timing of Third Stimulus Checks
Question: When will I get my third stimulus check?
Answer: Millions of Americans have already received their third stimulus check. And the IRS will be sending out more over the next several weeks. So, if you haven’t received your payment yet (assuming you’re eligible for a payment), it should arrive relatively soon.
How long it will take to send all payments is not known yet. The IRS has a lot on its plate right now. We’re in the middle of tax return filing season, so the IRS is already busy processing tax returns. The tax agency also has to send refunds for people who reported unemployment compensation on their 2020 return and come up with a way to send periodic child tax credit payments later this year. All of this could very well slow down the processing and delivery of third-round stimulus checks.
If the IRS already has your bank account information — either from a recent tax payment that you made, a tax refund it sent you, or some other source — then expect to get your third stimulus check faster. That’s because the IRS will be able to directly deposit the payment into your bank account. The IRS can also make a third stimulus payment to a Direct Express debit card account, a U.S. Debit Card account, or other Treasury-sponsored account. Otherwise, you’ll get a paper check in the mail.
If you already have a prepaid debit card from the IRS (e.g., for a first- or second-round stimulus check), you’ll get a new card if the IRS decides to send your third stimulus payment to you in that form. (But just because you received a debit card for an earlier stimulus payment doesn’t mean you’ll automatically get one for the third payment.)
You can check and track the status of your third payment by using the IRS’s “Get My Payment” tool. The website is available in English and Spanish.
Finally, since the stimulus payments are automatic for most eligible people, don’t bother calling your bank or the IRS to ask about the timing of your payment — that won’t make it come any sooner!
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People Who Don’t File a Tax Return
Question: What if I don’t file a 2019 or 2020 tax return?
Answer: Some people don’t file a tax return because their income doesn’t reach the filing requirement threshold. If that’s the case, the IRS will send a third stimulus check based on whatever information, if any, is available to it. That information potentially could come from the Social Security Administration, Railroad Retirement Board, or Veterans Administration if you’re currently receiving benefits from one of those federal agencies. If that’s the case, you’ll generally receive your third stimulus payment the same way that you get your regular benefits. (Note that, if your third stimulus check ends up being paid to a representative payee or fiduciary, the entire payment can only be used for your benefit.) If you supplied the IRS information last year through its online Non-Filers tool or by submitting a special simplified tax return, the tax agency can use that information, too.
Some people who receive a third stimulus check based on information from the SSA, RRB, or VA may still want to file a 2020 tax return even if they aren’t required to file to get an additional payment for a spouse or dependent.
If the IRS can’t gather enough information about you to send you a third stimulus check, you won’t lose out on the money — you’ll just have to wait until next year to claim it. As we already noted, the checks that will be sent now are really just advance payments of the 2021 Recovery Rebate tax credit. So, if the IRS doesn’t send you a third stimulus check, you can claim it as a refund or reduction of the tax you owe when you file a 2021 tax return (you can file a return just to claim the payment). You’ll have to file your return, or request an extension, by April 18, 2022.
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Children Born in 2021
Question: What if I had a child in 2021?
Answer: Unfortunately, if you had a child in 2021, you won’t get an additional $1,400 in your third stimulus check for him or her. That’s because your new bundle of joy wasn’t claimed as a dependent on your 2019 or 2020 tax return. You can, however, get an additional $1,400 Recovery Rebate credit for your new baby on your 2021 tax return.
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College Students and Young Adults Living at Home
Question: Will college students and young adults who live with their parents get a third stimulus check?
Answer: Anyone claimed as a dependent on someone else’s tax return won’t receive a third stimulus check. That means no payments to children living at home who are 17 or 18 years old, or to college students who are 23 or younger at the end of the year who don’t pay at least half of their own expenses.
However, unlike with the first- and second-round payments, the person claiming the college student or young adults as a dependent – typically their parents – will get an extra $1,400 per dependent tacked on to their third stimulus check. For the first two stimulus checks, the additional amount was only allowed for dependent children 16 years old or younger. But the American Rescue Plan allows the extra payment for any dependents – regardless of their age.
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Seniors Living with an Adult Child
Question: Will seniors who live with an adult child get a third stimulus check?
Answer: Again, anyone who is claimed as a dependent on someone else’s tax return doesn’t qualify for a third stimulus check. So, elderly people living with an adult child won’t get a check if they can be claimed as a dependent on their child’s tax return.
However, as with college students and young adults living with their parents, an adult child supporting an elderly parent will get an extra $1,400 added on to his or her third stimulus check if the elderly parent is a dependent. Again, the age of the dependent doesn’t matter for third-round stimulus checks like it did with earlier stimulus payments.
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Nonresident Aliens
Question: Will “nonresident aliens” get a third stimulus check?
Answer: Nonresident aliens are not eligible to receive a third stimulus check. Generally, you’re considered a nonresident alien if you’re not a U.S. citizen, you don’t have a green card, and you’re not physically present in the U.S. for the required amount of time. For more information on nonresident alien status, see IRS Publication 519.
A nonresident alien who receives a third stimulus check should return the payment according to the IRS rules.
(Trusts and estates aren’t eligible for third stimulus checks, either.)
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Social Security Numbers
Question: Do I have to have a Social Security number to get a third stimulus check?
Answer: In most cases, you must have a Social Security number to receive a third stimulus check. Generally, your spouse and any dependent you’re receiving an extra $1,400 for must also have a social security number. If neither spouse has a valid social security number, you will only receive up to $1,400 for each qualifying dependent. An individual taxpayer identification number (ITIN) is not good enough.
There are a few exceptions to this rule:
An adopted dependent can have an adoption taxpayer identification number (ATIN) instead of a Social Security number;
For married members of the U.S. armed forces, only one spouse needs to have a Social Security; and
If your spouse doesn’t have a Social Security number, you can still receive a third stimulus check if you have a Social Security number.
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Back Taxes, Child Support and Other Debts
Question: Can the IRS or other creditors take my third stimulus check if I owe back taxes, child support or other debts?
Answer: Your third stimulus check is not subject to reduction or offset to pay child support, federal taxes, state income taxes, debts owed to federal agencies, or unemployment compensation debts. (If you owed child support, the IRS could use first-round stimulus check money to pay arrears.)
However, the American Rescue Plan doesn’t include additional protections that were included in the legislation authorizing the second round of stimulus checks. For example, second-round stimulus checks weren’t subject to garnishment by creditors or debt collectors. They couldn’t be lost in bankruptcy proceedings, either. The IRS also had to encode direct deposit payments so that banks knew they couldn’t be garnished.
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Impact on Benefits
Question: Will my third stimulus check affect the benefits I receive?
Answer: No. Your third stimulus check won’t be counted as income when determining if you’re eligible for benefits or assistance, or how much you can receive, under any federal program or any state or local program financed in whole or in part with federal funds. These programs also can’t count stimulus payments as a resource for purposes of determining eligibility for a period of 12 months from the time you receive your payment.
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Dead People
Question: Can a dead person get a third stimulus check?
Answer: For the third round of stimulus checks, anyone who died before January 1, 2021, is not eligible to receive a payment. Essentially, they’re treated as if they don’t have a Social Security number.
There is an exception for military personnel. If a person who died before 2021 was married and a member of the U.S. military, the surviving spouse can still receive a third stimulus check even if he or she doesn’t have a Social Security number.
The extra $1,400 per dependent is also off the table if the parent died before 2021 or, in the case of a joint return, both parents died before then.
If you filed a joint 2020 tax return and your spouse died before 2021, the decedent won’t be included for purposes of calculating a third stimulus payment. The surviving spouse, if eligible, will be sent a payment for up to $1,400, plus an additional $1,400 for any qualifying dependents. If you can’t cash or deposit a stimulus payment because it was issued to you and a deceased spouse, you must return it according to the IRS rules. Include a letter requesting that the third stimulus payment be reissued in the surviving spouse’s name only.
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Inmates
Question: Can a person in jail or prison get a third stimulus check?
Answer: Yes. There’s nothing in the American Rescue Plan that prevents incarcerated people from receiving a third stimulus check. If they’re otherwise eligible, they’ll receive a stimulus check or will be able to claim a Recovery Rebate credit like anyone else.
There was nothing in the CARES Act to prevent first-round checks to inmates, either. However, the IRS initially deemed them ineligible for a payment. That decision was challenged in court…and the IRS lost.
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Notice of Payment
Question: Will I receive a notice from the IRS about my payment?
Answer: Yes, the IRS will send you a notice about your third stimulus payment (Notice 1444-C). The tax agency will provide an update on the timeline for delivery of the notices when one is available.
Keep your notice with your tax records. You’ll need it to calculate the Recovery Rebate tax credit for your 2021 tax return, which you’ll have to file next year.
The IRS won’t contact you by email, text message, or social media channels to request personal or financial information related to a stimulus payments. Watch out for messages, websites, and social media attempts that request money or personal information and for schemes tied to stimulus checks!
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Stay on Top of Stimulus-Check Developments
Follow Kiplinger for the latest news and insights on federal stimulus payments (and other important personal-finance matters). Stay with us on:
See some of our other coverage of the third stimulus check:
You worked hard for your retirement nest egg, so the idea of paying taxes on those savings isn’t exactly appealing. If you know what you’re doing, you can avoid overpaying Uncle Sam as you start collecting Social Security and making withdrawals (including RMDs) from IRAs and 401(k)s. Unfortunately, though, retirees don’t always know all the tax code ins and outs and, as a result, end up paying more in taxes than is necessary. For example, here are 10 questions retirees often get wrong about taxes in retirement. Take a look and see how much you really understand about your own tax situation.
(And check out our State-by-State Guide to Taxes on Retirees to learn more about how you will be taxed by your state during retirement.)
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Tax Rates in Retirement
Question: When you retire, is your tax rate going to be higher or lower than it was when you were working?
Answer: It depends. Many people make their retirement plans with the assumption that they’ll fall into a lower tax bracket once they retire. But that’s often not the case, for the following three reasons.
1. Retirees typically no longer have all the tax deductions they once did. Their homes are paid off or close to it, so there’s no mortgage interest deduction. There are also no kids to claim as dependents, or annual tax-deferred 401(k) contributions to reduce income. So, almost all your income will be taxable during retirement.
2. Retirees want to have fun—which costs money. If you’re like many newly retired folks, you might want to travel and engage in the hobbies you didn’t have time for before, and that doesn’t come cheap. So, the income you set aside for yourself in retirement may not be much lower than what you were making in your job.
3. Future tax rates may be higher than they are today. Let’s face it…tax rates now are low when viewed in a historical context. The top tax rate of 37% in 2021 is a bargain compared with the 94% of the 1940s and even the 70% range as recently as the 1970s. And considering today’s political climate and growing national debt, future tax rates could end up much higher than they are today.
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Taxation of Social Security Benefits
Question: Are Social Security benefits taxable?
Answer: Yes. Depending on your “provisional income,” up to 85% of your Social Security benefits are subject to federal income taxes. To determine your provisional income, take your modified adjusted gross income, add half of your Social Security benefits and add all of your tax-exempt interest.
If you’re married and file taxes jointly, here’s what you’ll be looking at:
If your provisional income is less than $32,000 ($25,000 for singles), there’s no tax on your Social Security benefits.
If your income is between $32,000 and $44,000 ($25,000 to $34,000 for singles), then up to 50% of your Social Security benefits can be taxed.
If your income is more than $44,000 ($34,000 for singles), then up to 85% of your Social Security benefits are taxable.
The IRS has a handy calculator that can help you determine whether your benefits are taxable. You should also check out Calculating Taxes on Social Security Benefits.
And don’t forget state taxes. In most states (but not all!), Social Security benefits are tax-free.
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Withdrawals from Roth IRAs
Question: Are withdrawals from Roth IRAs tax-free once you retire?
Answer: Yes. Roth IRAs come with a big long-term tax advantage: Unlike their 401(k) and traditional IRA cousins—which are funded with pretax dollars—you pay the taxes on your contributions to Roths up front, so your withdrawals are tax-free once you retire. One important caveat is that you must have held your account for at least five years before you can take tax-free withdrawals. And while you can withdraw the amount you contributed at any time tax-free, you must be at least age 59½ to be able to withdraw the gains without facing a 10% early-withdrawal penalty.
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Taxation of Annuity Income
Question: Is the income you receive from an annuity you own taxable?
Answer: Probably (at least for some of it). If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. The insurance company that sold you the annuity is required to tell you what is taxable. Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income. In addition, be aware that you’ll have to pay any taxes that you owe on the annuity at your ordinary income-tax rate, not the preferable capital gains rate.
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Age for Starting RMDs
Question: At what age must holders of traditional IRAs and 401(k)s start taking required minimum distributions (RMDs)?
Answer: Age 72. The SECURE Act raised the age for RMDs to 72, starting on January 1, 2020. It used to be 70½. (Note that, although the CARES Act waived RMDs for 2020, they’re back for 2021 and beyond.)
As for the amount that you are forced to withdraw: You’ll start out at about 3.65%, and that percentage goes up every year. At age 80, it’s 5.35%. At 90, it’s 8.77%. Figuring out the percentages might not be as hard as you think if you try our RMD calculator. (Note that, beginning in 2022, RMD calculations will be adjusted so that distributions are spread out over a longer period of time.)
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RMDs From Multiple IRAs and 401(k)s
Question: Are RMDs calculated the same way for distributions from multiple IRAs and multiple 401(k) plans?
Answer: No. There’s one important difference if you have multiple retirement accounts. If you have several traditional IRAs, the RMDs are calculated separately for each IRA but can be withdrawn from any of your accounts. On the other hand, if you have multiple 401(k) accounts, the amount must be calculated for each 401(k) and withdrawn separately from each account. For this reason, some 401(k) administrators calculate your required distribution and send it to you automatically if you haven’t withdrawn the money by a certain date, but IRA administrators may not automatically distribute the money from your IRAs.
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Due Date for Your First RMD
Question: Do you have to take your first RMD by December 31 of the year you turn 72?
Answer: No. Normally, you have to take RMDs for each year after you turn age 72 by the end of the year. However, you don’t have to take your first RMD until April 1 of the year after you turn 72. But be careful—if you delay the first withdrawal, you’ll also have to take your second RMD by December 31 of the same year. Because you’ll have to pay taxes on both RMDs (minus any portion from nondeductible contributions), taking two RMDs in one year could bump you into a higher tax bracket.
It could also have other ripple effects, such as making you subject to the Medicare high-income surcharge if your adjusted gross income (plus tax-exempt interest income) rises above $88,000 if you’re single or $176,000 if married filing jointly. (Note: Those are the income thresholds for determining 2021 surcharges.)
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Taxation of Life Insurance Proceeds
Question: If your spouse dies and you get a big life insurance payout, will you have to pay tax on the money?
Answer: No. You have enough to deal with during such a difficult time, so it’s good to know that life insurance proceeds paid because of the insured person’s death are not taxable.
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Estate Tax Threshold
Question: How valuable must an individual’s estate be at death to be hit by federal estate taxes in 2021?
Answer: $11.7 million ($23.4 million or more for a married couple). If the value of an estate is less than the threshold amount, then no federal estate tax is due. As a result, federal estate taxes aren’t a factor for very many people. However, that will change in the future. The 2017 tax reform law more than doubled the federal estate tax exemption threshold—but only temporarily. It’s schedule to drop back down to $5 million (plus adjustments for inflation) in 2026. Plus, during his 2020 campaign, President Biden called for a reduction of the exemption threshold sooner.
If your estate isn’t subject to federal taxes, it still might owe state taxes. Twelve states and the District of Columbia charge a state estate tax, and their exclusion limits can be much lower than the federal limit. In addition, six states impose inheritance taxes, which are paid by your heirs. (See 18 States With Scary Death Taxes for more details.)
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Standard Deduction Amounts
Question: If you’re over 65, can you take a higher standard deduction than other folks are allowed?
Answer: Yes. For 2021, to the standard deduction for most people is $12,550 if you’re single and $25,100 for married couples filing a joint tax return ($12,400 and $24,800, respectively, for 2020). However, those 65 and older get an extra $1,700 in 2021 if they’re filing as single or head of household ($1,650 for 2020). Married filing jointly? If one spouse is 65 or older and the other isn’t, the standard deduction increases by $1,350 ($1,300 for 2020). If both spouses are 65 or older, the increase for 2021 is $2,700 ($2,600 for 2020).
According to Kelley Blue Book, the average price for a light vehicle in the United States was almost $38,000 in March 2020. Of course, the sticker price will depend on whether you want a small economy car, a luxury midsize sedan, an SUV or something in between. But the total you pay for a vehicle also depends on a number of other factors if you’re taking out a car loan.
Get the 4-1-1 on financing a car so you can make the best decision for your next vehicle purchase.
Whether or not you should finance your next vehicle purchase is a personal decision. Most people finance because they don’t have an extra $20,000 to $50,000 they want to part with. But if you have the cash, paying for the car outright is the most economical way to purchase it.
For most people, deciding whether to finance a car comes down to a few considerations:
Do you need the vehicle enough to warrant making a monthly payment on it for several years?
Does the monthly payment work within your personal budget?
Is the deal, including the interest rate, appropriate?
Factors to Consider When Financing a Car
Obviously, the first thing to consider is whether you can afford the vehicle. But to understand that, you need to consider a few factors.
Total purchase price. Total purchase price is the biggest impact on how much you’ll pay for the car. It includes the price of the car plus any add-ons that you’re financing. Depending on the state and your own preferences, that might include extra options on the vehicle, taxes and other fees and warranty coverage.
Interest rate, or APR. The interest rate is typically the second biggest factor in how much you’ll pay overall for a car you finance. APR sounds complex, but the most important thing is that the higher it is, the more you pay over time. Consider a $30,000 car loan for five years with an interest rate of 6%—you pay a total of $34,799 for the vehicle. That same loan with a rate of 9% means you pay $37,365 for the car.
The terms. A loan term refers to the length of time you have to pay off the loan. The longer you extend terms, the less your monthly payment is. But the faster you pay off the loan, the less interest you pay overall. Edmunds notes that the current average for car loans is 72 months, or six years, but it recommends no more than five years for those who can make the payments work.
It’s important to consider the practical side of your vehicle purchase. If you take out a car loan for eight years, is your car going to still be in good working order by the time you get to the last few years? If you’re not careful, you could be making a large monthly payment while you’re also paying for car repairs on an older car.
Buying a Car with No Credit
You can buy a car anytime if you have the cash for the purchase. If you have no credit or bad credit, your options for financing a car might be limited. But that doesn’t mean it’s impossible to get a car loan without credit.
Many banks and lenders are willing to work with people with limited credit histories. Your interest rate will likely be higher than someone with excellent credit can command, though. And you might be limited on how much you can borrow, so you probably shouldn’t start looking at luxury SUVs. One tip for increasing your chances is to put as much cash down as you can when you buy the car.
If you can’t get a car loan on your own, you might consider a cosigner. There are pros and cons to asking someone else to sign on your loan, but it can get you into the credit game when the door is otherwise barred.
Personal Loans v. Car Loans: Which One Is Better?
Many people wonder if they should use a personal loan to buy a car or if there is really any difference between these types of financing. While technically a car loan is a loan you take out personally, it’s not the same thing as a personal loan.
Personal loans are usually unsecured loans offered over relatively short-term periods. The funds you get from a personal loan can typically be used for a variety of purposes and, in some cases, that might include buying a car. There are some great reasons to use a personal loan to buy a car:
If you’re buying a car from a private seller, a personal loan can hasten the process.
Traditional auto loans typically require full coverage insurance for the vehicle. A personal loan and liability insurance may be less expensive.
Lenders typically aren’t interested in financing cars that aren’t in driving shape, so if you’re buying a project car to work on in your garage during your downtime, a personal loan may be the better option.
But personal loans aren’t necessarily tied to the car like an auto loan is. That means the lender doesn’t necessarily have the ability to repossess the car if you stop paying the loan. Since that increases the risk for the lender, they may charge a higher interest rate on the loan than you’d find with a traditional auto loan. Personal loans typically have shorter terms and lower limits than auto loans as well, potentially making it more difficult for you to afford a car using a personal loan.
Steps You Should Follow When Financing a Car
Before you jump in and apply for that car loan, review these six steps you should take first.
1. Check your credit to understand whether you are likely to be approved for a loan. Your credit also plays a huge role in your interest rate. If your credit is too low and your interest rate would be prohibitively high, it might be better to wait until you can build or repair your credit before you get an auto loan. Sign up for ExtraCredit to see 28 of your FICO scores from all three credit bureaus.
2. Research auto loan options to find the ones that are right for you. Avoid applying too many times, as these hard inquiries can drag your credit score down with hard inquiries. The average auto loan interest rate is 27% on 60-month loans (as of April 13, 2020).
3. Get your trade-in appraised. The dealership might give you money toward your trade-in. That reduces the price of the car you purchase, which reduces how much you need to borrow. A few thousand dollars can mean a more affordable loan or even the difference between being approved or not.
4. Get prequalified for a loan online. While most dealers will help you apply for a loan, you’re in a better buying position if you walk into the dealership with funding ready to go. Plus, if you’re prequalified, you have a good idea what you can get approved for, so there are fewer surprises.
5. Buy from a trusted dealer. Unfortunately, there are dealerships and other sellers that prey on people who need a car badly. They may charge high interest or sell you a car that’s not worth the money you pay. No matter your financial situation, always try to work with a dealership that you can trust.
6. Talk to your car insurance company. Different cars will carry different car insurance premiums. Make a call to your insurance company prior to the sale to discuss potential rate changes so you’re not surprised by a higher premium after the fact.
Next to buying a home, buying a car is one of the biggest financial decisions you’ll make in your life, and you’ll likely do it more than once. Make sure you understand the ins and outs of financing a car before you start the process.
The year 2021 is looking a lot like 2020, at least in terms of taxes.
The IRS released its inflation adjustments for 2021 federal income tax rates and brackets. While these changes are unlikely to have a huge impact on your bottom line, there are a few things you should be aware of.
Because these are the 2021 tax rates, they’ll determine your tax bill that will be due in 2022. You’ll use 2020 rates and brackets when you file your taxes on or before May 17, 2021. That’s 32 days later than usual due to the tax deadline extension.
How the 2021 Tax Brackets Break Down
There are seven tax brackets that range from 10% to 37%. The 2020 and 2021 tax brackets break down as follows:
Unmarried Individuals
Tax Bracket
Taxable Income for 2020 (use when you file in 2021)
Taxable income for 2021 (use when you file in 2022)
10%
Up to $9,875
Up to $9,950
12%
$9,875 to $40,125n
$9,950 to $40,525
22%
$40,125 to $85,525
$40,525 to $86,375
24%
$85,525 to $163,300
$86,375 to $164,925
32%
$163,300 to $207,350
$164,925 to $209,425
35%
$207,350 to $518,400
$209,425 to $523,600
37%
Over $518,400
Over $523,600
Married Individuals Filing Jointly or Surviving Spouses
Tax Bracket
Taxable income for 2020 (use when you file in 2021)
Taxable income for 2021 (use when you file in 2022)
10%
Up to $19,750
Up to $19,900
12%
$19,750 to $80,250n
$19,900 to $81,050
22%
$80,250 to $171,050
$81,050 to $172,750
24%
$171,050 to $326,600
$172,750 to $329,850
32%
$326,600 to $414,700n
$329,850 to $418,850
35%
$414,700 to $622,050n
$418,850 to $628,300
37%
Over $622,050
Over $628,300
Heads of Household
Tax Bracket
Taxable income for 2020 (use when you file in 2021)
Taxable income for 2021 (use when you file in 2022)
10%
Up to $14,100
Up to $14,200
12%
$14,100 to $53,700n
$14,200 to $54,200
22%
$53,700 to $85,500
$54,200 to $86,350
24%
$85,500 to $163,300
$86,350 to $164,900
32%
$163,300 to $207,350
$164,900 to $209,400
35%
$207,350 to $518,400
$209,400 to $523,600
37%
Over $518,400
Over $523,600
Pro Tip
Not sure of your filing status? This interactive IRS quiz can help you determine the correct status. If you qualify for more than one, it tells you which one will result in the lowest tax bill.
Tax rates apply to the income within each bracket. So if you’re an unmarried individual with taxable income of $50,000, you won’t pay 22% of that $50,000 to Uncle Sam.
According to the 2021 tax brackets (the ones you’ll use for next year’s return), you’d pay:
10% on the first $9,950
12% on the next $30,575 ($40,525 – $9,950 = $30,575)
22% on the next $9,475 ($50,000 – $40,525 = $9,475)
2 Tax Changes That Could Affect You in 2021
The modified tax brackets aren’t the only changes for 2021. About 60 tax provisions were adjusted in the new year. A few highlights:
The standard deduction will rise slightly: For 2020, the standard deduction is $12,400 for single filers and people who are married filing separately. In 2021, it will rise by $150 to $12,550 for single taxpayers. For those who are married filing jointly, the standard deduction will rise by $300, from $24,800 in 2020 to $25,100 in 2021.
Some limited-income families can get an extra $68. The maximum Earned Income Tax Credit will increase in 2021 to $6,728, from $6,660 in 2020. You need at least three children to qualify for the maximum amount.
3 Tax Rules That Aren’t Changing in 2021
IRA contribution limits won’t change. The traditional IRA and Roth IRA contribution limits will remain at $6,000 for people under 50. The extra $1,000 “catch-up” contribution the IRS allows people 50 and older to make won’t change either. You can still fund your IRA for 2020 until tax day, which is May 17, 2021.
401(k) contribution limits aren’t changing either: If you have an employer-sponsored tax-deferred retirement plan, like a 401(k) or 403(b), your maximum contribution is still $19,500 in 2021. The additional “catch-up” contribution workers ages 50 and older can make will also remain at $6,500.
There’s no limit on itemized deductions. The Tax Cuts and Jobs Act of 2017 suspended these limits.
Ready to Start Your 2021 Tax Prep?
If you’re ready to dive into your taxes, you can check out this comprehensive summary of 2021 tax changes courtesy of the IRS.
Even if you’re not ready to jump into 2021 tax planning mode just yet, keep in mind it’s a good time to check your tax withholdings and make adjustments if necessary. Just make sure you file your return or ask for an extension by the May 17 deadline. If you can’t afford your tax bill for 2020, it’s essential that you file a tax return anyway and ask for an IRS payment plan.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]
There are a lot of good reasons to buy a house, and probably a lot of bad ones too.
But all too often, folks seem to get fixated on the investment side of things above all else, as if they’re playing the stock market.
This is especially true at the moment, with home prices up substantially since the housing crisis that look place about a decade ago.
Simply put, people don’t want to overpay or buy a home at the top of the market, especially with bidding wars all too common again. And that’s a fair concern.
The thing is, a house isn’t just an investment, if it’s even an investment at all.
It’s shelter if you plan on residing in it. A roof over your head to keep the rain and the cold out.
It’s a safe place where you can put down roots and create a foundation, maybe start a family.
So when you consider that pros and cons of buying a house list, you need to think outside the box as well.
You shouldn’t simply consider current home prices, or attempt to time the market to determine that right time to buy.
Homeownership is much more than that, though I do recognize everyone wants to get a good deal, whether buying a new pair of shoes or real estate.
That being said, let’s look at some reasons why buying a home can be about much more than the investment.
1. Stay as long as you pay
For me, this is a biggie. When you rent, you’re at the mercy of your landlord. You own nothing.
Once your lease comes to an end, they may decide to sell the property, rent it to someone else, or simply move into it themselves.
The takeaway is that when you rent, you don’t have any sort of stability outside the duration of your lease. If you want to put down roots, or call the shots, renting won’t get it done.
This can be very important for you and your children, assuming you have or want some.
2. You can lock in the price
Another huge factor in buying a home is the ability to lock in your price.
By that, I mean your monthly housing payment, which won’t change, even if home prices rise substantially over time.
Sure, there could be some fluctuation with insurance and property taxes, but if you take out a fixed-rate mortgage, you can pay the same basic amount for the life of the loan.
If you rent, you might see your monthly rent increase annually, depending on what the landlord decides and/or if you’re subject to rent control. Either way, there’s not much certainty.
3. Inflation hedge
Speaking of rising rents, real estate can be a great inflation hedge because you can keep paying the same amount you paid a decade ago while renters deal with the diminishing value of the dollar over time.
For example, your hypothetical $1,500 mortgage payment today probably won’t feel like so much in the year 2032.
Meanwhile, a renter might have to grapple with increasing rents based on the lower value of the dollar over time.
At the same time, your home’s value will likely rise over time simply due to inflation, so it’s potentially a better place to stash your cash than a bank account or elsewhere.
4. Forced savings
Another financial plus to homeownership is the concept of forced savings.
Each month, a portion of your mortgage payment goes toward the principal balance of your loan, assuming you have a mortgage (and a fully-amortizing one).
This essentially forces you to set aside a certain amount of money each month for the entire loan term, or until you sell and move on.
If you’re not a great saver, or a terrible one like most Americans, a mortgage can require you to save, whether you like it or not.
And when it comes time to sell, all those months of savings will represent your home equity.
To put it in perspective, the average homeowner has a net worth of around $255,000 versus a mere $6,000 for the typical renter, mostly due to equity.
5. To be close to work or school
You’ve heard the old location, location, location line. It’s true for property values, but also true if you want to be in a certain school district, or close to work.
If you can cut down your commute and/or situate yourself in an excellent school district, the value is essentially immeasurable.
The same goes for being close to family, friends, or in a certain community that resonates with you for whatever reason.
6. More living space for a family
Here’s another mega-important reason to buy a home – the space. If you plan on starting a family, or are already in the midst of it, a home can be a great asset for your sanity.
The unexpected COVID-19 pandemic highlighted the importance of personal space, whether it was the need for a home office or simply an outdoor area to find some peace.
It’s not a coincidence that condo listings constantly have a nursery in them. The new parents got the message fast and realized it was time to move out and buy a home instead.
Sure, you can rent a home too, but as I said earlier, that won’t provide stability, which is probably the last thing you want with little ones running around in diapers.
7. Backyards are nice
Aside from those extra bedrooms, it’s also nice to have an outdoor space that you can call your own. Maybe even a pool and a spa that you can relax in, weather permitting.
That space will also come in handy if/when you have kids, giving them room to explore and an excuse to put down the iPad.
The same is true for pet owners – I wrote a while back that Millennials were buying homes to give their dogs more space. And it’s hard to argue with them, as silly as it might seem.
Living in an apartment with a dog can be a hassle, not to mention a bummer for the dog. And you may not even be able to have one, depending on the HOA rules.
8. You can make it yours
There’s also the freedom of design you get with your own home. When it’s yours, truly yours, you can do whatever you want with it.
You can repaint it, tear down (non-load bearing) walls, renovate bathrooms and kitchens, landscape, etc., etc. The possibilities are endless, really.
When you rent, you might get to do some things, but even if you are able to do them, it’s not really yours.
You’ve either improved your landlord’s property (lucky them) or simply made a temporarily better space for yourself.
9. Pride of ownership
Along those same lines, there’s a pride of ownership associated with owning a home. It feels good to own as opposed to rent. It’s an accomplishment.
You’re the boss and you can reflect on your hard work as you relax in your property.
The American Dream typically includes buying your first home, and that will probably never change.
Owning a piece of land can be very fulfilling, as can having an active role in your community as a homeowner.
10. Something to pass along
Lastly, owning a home means you have something to pass along in the future.
Many homeowners grow to love their properties, so much so that they insist that they stay in the family.
It would certainly be nice to have something to show for all your blood, sweat, and tears over the years. And even sweeter to be able to take care of those you love after the fact.
If you rent, you simply walk away at the end with nothing. If you own, you wind up with something of value that can be shared.
Ultimately, all of the reasons mentioned are investments in their own right, even if not strictly monetary.
Take the time to consider them when you ponder homeownership and don’t get too caught up in trying to time the market or make a quick buck.
Read more: Buying a Home in 2021? 11 Tips to Get It Done!
