This Often-Overlooked Way to Fund Your Roth IRA Has Many Advantages

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.

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.

Source: kiplinger.com

Is a 2% 30-Year Fixed Mortgage a Real Possibility?

Week after week, mortgage rates continue to shatter records, and dip to levels no one thought was possible.

It seems as if every month we have to revisit the conversation because what seemed like a bottom wasn’t.

In fact, not too long ago a 30-year fixed mortgage in the 3% range seemed absurd. Now it’s the norm, and everyone seems to want better.

This week, the hugely popular 30-year fixed averaged 3.53%, down from 3.56% last week, per Freddie Mac data. That’s a new all-time low.

And the 30-year fixed has been below 4% in every week but one so far in 2012. So to say it’s been a good year for mortgage rates would be a massive understatement.

By the way, the 15-year fixed also discovered new record territory at 2.83%, down from 2.86% last week.

[30-year fixed vs. 15-year fixed]

So this all begs the question, “Can the 30-year fixed fall below 3%?”

Is It Possible?

If you talk to most bankers, mortgage brokers, or anyone else who tracks the mortgage market, they’ll probably tell you to lock your mortgage rate and forget about it.

At the very least you’ll sleep soundly at night, right? After all, mortgage rates are already at record lows, so why get greedy?

But these same people would have made the same recommendation a year ago when mortgage rates were a percentage point higher.

Heck, I was one of the many that figured rates were bottoming, or very close to a bottom.

I’ve argued many times that the 30-year fixed probably wouldn’t go much lower than 3.5%, but I’ll probably be eating my hat now (if I owned one).

I’ll admit I was wrong, but now I’m focused on how low rates can actually go.

In case you didn’t know, mortgage rates follow the 10-year Treasury bond yield, which is currently around 1.50%.

And because the 30-year fixed is pricing around 3.50%, the spread is about 200 basis points.

[What mortgage rate can I expect?]

If the Yield Keeps Falling…

If the yield were to fall to around 1%, then the 30-year fixed could dip below 3%, and homeowners would finally be able to get their hands on a 2% 30-year fixed mortgage.

I don’t mean 2% literally, but something in the 2% range. So something around 2.75% or 2.875%, which would be nothing short of spectacular.

And if you think it’s impossible, note that a number of Wall Street bears see that yield falling to around 1% by the end of the year, thanks to the looming so-called “fiscal cliff.”

The fiscal cliff refers to the end of some major Bush-era tax breaks and spending cuts, which some argue could lead us in to recession again.

But it’s still very questionable – most believe things will be sorted out at the eleventh hour, with benefits possibly extended, as to not make a very fragile situation any more vulnerable.

However, with all that uncertainty, demand for “safe” bonds could push that yield lower and lower, meaning you may have to refinance again in the near future if you want a lower mortgage rate than your friends.

It’s not to say that you should cancel your refinance application today and wait for better, because as mentioned, we are in unprecedented times and you’ll certainly have a great rate either way.

But don’t be surprised if mortgage rates continue to trickle even lower, as insane as that may sound.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Social Security Recipients to Get Third Stimulus Check This Week

Millions of seniors who didn’t file a 2019 or 2020 tax return could receive a third stimulus check this week. After receiving data from the Social Security Administration (SSA) on March 25, the IRS was able to start processing third stimulus payments for approximately 30 million seniors. These people will generally get their stimulus payment in the same way they get their regular Social Security benefits. Since most of these payments will be paid electronically through direct deposits or to existing Direct Express debit cards, the funds should be available on April 7 for many seniors.

Third stimulus payments are generally based on information found on your 2019 or 2020 tax return. That’s why many people who receive Social Security benefits who filed a 2019 or 2020 return, or who used the IRS’s Non-Filers tool last year, already received a third stimulus check. However, since some Social Security recipients don’t file tax returns, the IRS didn’t have the necessary information in its computer systems to process third-round stimulus payments for them. That’s why the tax agency needed data from the SSA to send out checks to seniors who haven’t file a recent tax return.

In addition to seniors receiving Social Security retirement benefits, payments will also be arriving on April 7 for some people receiving Social Security disability (SSDI), Supplemental Security Income (SSI), or Railroad Retirement Board (RRB) benefits who didn’t file a 2019 or 2020 tax return or didn’t use the Non-Filers tool. The IRS is still reviewing data received from the Department of Veterans Affairs for people who receive VA benefits, so payments to them will come later (probably in mid-April).

Most Social Security, SSDI, SSI, and RRB beneficiaries who are eligible for a third stimulus check don’t need to take any action to receive a payment (not everyone is eligible). However, as with previous stimulus payments, some beneficiaries may need to file a 2020 tax return – even if they don’t usually file – to provide the IRS the information it needs to send an additional $1,400 for any dependents. The deadline for filing a 2020 tax return has been pushed back from April 15 to May 17, 2021.

[Stay on top of all the new stimulus bill developments – Sign up for the Kiplinger Today E-Newsletter. It’s FREE!]

Amount of Your Third Stimulus Check

Every eligible American will receive a $1,400 third stimulus check “base amount.” The base amount jumps to $2,800 for married couples filing a joint tax return. You also get an extra $1,400 for each dependent in your family (regardless of the dependent’s age).

Not everyone will receive the full amount, though. As with the first two stimulus payments, third-round stimulus checks will be reduced – potentially to zero – for people reporting an adjusted gross income (AGI) above a certain amount on their latest tax return. If you filed your most recent tax return as a single filer, your third stimulus check will be phased-out if your AGI is $75,000 or more. That threshold jumps to $112,500 for head-of-household filers, and to $150,000 for married couples filing a joint return. Third-round stimulus checks will be completely phased out for single filers with an AGI above $80,000, head-of-household filers with an AGI over $120,000, and joint filers with an AGI exceeding $160,000.

You can use our handy Third Stimulus Check Calculator to get a customized estimated payment amount. All you have to do is answer three easy questions.

How to Track the Status of Your Third Stimulus Check

The IRS’s “Get My Payment” tool lets you track your third stimulus check payment. The online portal lets you:

  • Check the status of your stimulus payment;
  • Confirm your payment type (paper check or direct deposit); and
  • Get a projected direct deposit or paper check delivery date (or find out if a payment hasn’t been scheduled).

Payments for Social Security recipients and other federal beneficiaries with an official payment date of April 7 may show up in the portal before that date as “pending” or “provisional” payments.

For more information about the tool, see Where’s My Stimulus Check? Use the IRS’s “Get My Payment” Tool to Get an Answer.

Source: kiplinger.com

10 Things That Lower Your Social Security Check

Senior couple on a computer
SUPERMAO / Shutterstock.com

You’ve worked hard for Social Security retirement benefits, and you probably want every dollar you’re entitled to receive.

Unfortunately, the sad reality is that there are reasons why your Social Security payments could decrease. Many are in your control, but some are not.

Keep reading to find out how your monthly check could get dinged for everything from poor timing on your part to poor planning on the government’s end.

1. Failing to catch incorrect wage information

A young black man gets angry at his laptop computer while working at his office desk
Roman Samborskyi / Shutterstock.com

Social Security benefits are based on your lifetime earnings record. If the government doesn’t have the correct wage information for you, the result could be a smaller Social Security check.

To make sure the government has the right info on your wages, sign up for your own account at the Social Security Administration (SSA) website. Among other things, you can use the account to review your earnings history.

For more on Social Security accounts and earnings histories, check out “9 Social Security Terms Everyone Should Know.”

2. Receiving some types of pensions

Worried senior couple
wavebreakmedia / Shutterstock.com

Some workers may not be eligible for Social Security as a result of the nature of their employment. As we report in “6 Types of People Who Can’t Count on Social Security“:

“Not every worker pays into the Social Security system. In certain states, public employees are not covered by Social Security due to receiving a pension. They can include employees of state and local government agencies, including school systems, colleges and universities. In some states, they may also include police officers and firefighters.”

3. Missing the Medicare application window

K.D.P. / Shutterstock.com

While the full retirement age for Social Security has been slowly changing, the age for Medicare eligibility has remained the same. That means that even if you aren’t applying for Social Security until age 66 or later, you need to apply for Medicare at age 65.

Failure to do so could result in late enrollment penalties. For instance, Medicare Part B premiums are 10% higher for every 12-month period a person fails to sign up for Medicare coverage when they are eligible. Because Medicare payments generally are taken from your Social Security benefit, this could lower your Social Security benefit each month.

4. Rising Medicare premiums

Rayjunk / Shutterstock.com

Even if you apply for Medicare on time, you could find that your Social Security payments take a hit from rising Medicare premiums. That’s because Medicare premiums generally are deducted from Social Security payments.

In 2012, people paid $99.90 per month for Medicare Part B, which covers outpatient services. For 2020, that premium is $144.60 for most people, with high earners paying more — between $202.40 and $491.60, depending on their income.

5. Claiming retirement benefits early

travel
Ekaterina Pokrovsky / Shutterstock.com

Claiming your Social Security benefits earlier than your full retirement age (an age set by the SSA) will result in a smaller check going forward. While the government is happy to start sending you monthly checks at age 62, it is going to reduce your monthly payment — possibly by up to one-third or more.

The reduction is permanent, so don’t expect to see a big bump in benefits once you reach your full retirement age.

6. Getting your full retirement age wrong

senior man
Roman Samborskyi / Shutterstock.com

You may think you’re doing everything right by filing for Social Security benefits at age 65, but filing at that age will reduce your payments as well. Although 65 was long considered the full retirement age, the government has been slowly moving the goalposts.

If you were born between 1943 and 1954, your full retirement age is 66. The number increases by two months each year (for example, 66 and 6 months for those born in 1957) until reaching a full retirement age of 67 for those born in or after 1960.

7. Earning too much income as an early retiree

sirtravelalot / Shutterstock.com

If you decide to go the early retirement route, you should think twice about continuing to work while receiving Social Security benefits. In 2021, if you are younger than your full retirement age but old enough to have started taking Social Security, you can only earn up to $18,960 before a portion of your benefits is withheld. In that situation, the government reduces monthly benefits by $1 for every $2 earned above that amount.

If you’ll hit your full retirement age this year, you can earn up to $50,520 in the months leading up to your birthday. Exceeding that amount means the Social Security Administration will take $1 for every $3 you earn over the limit.

Fortunately, these aren’t permanent reductions in your benefits. And, starting with the month you reach full retirement age, there is no limit on how much you can earn. In addition, any benefits withheld because of your earnings will be added back to your benefits each month starting at your full retirement age.

8. Owing taxes or child support

Worried stressed businessman
fizkes / Shutterstock.com

The government can also take money from Social Security to pay for back taxes or child support.

Garnishment for taxes is limited to 15% of your monthly benefits. However, if you owe child support, get ready for the government to take as much as 65% of your benefits to pay for that obligation.

9. Defaulting on federal student loans

Student loans
PHOTOBUAY / Shutterstock.com

Thanks to a U.S. Treasury rule, debt collectors for credit cards and other consumer accounts can’t garnish your Social Security benefits. However, that protection doesn’t extend to debts owed to the federal government. If you have defaulted on federal student loans for yourself or loans you took out for a child, some of your Social Security benefits can be withheld to pay off the debt.

10. Outliving the Social Security trust fund

A senior man opens an empty wallet
perfectlab / Shutterstock.com

Your Social Security benefits might take a hit if you outlive the program’s trust fund. According to the 2020 Trustees Report, the Old-Age and Survivors Insurance Trust Fund — which pays out Social Security retirement benefits — will run out of cash in 2034.

The retirement of the largest generation in U.S. history, the baby boom generation, is challenging the system as the cost of those workers’ benefits grows faster than the working-age population paying into the system.

After 2034, the program will only have enough income from employed workers to pay 76% of Social Security benefits, the report notes.

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

Source: moneytalksnews.com

Making the Argument for an Adjustable-Rate Mortgage

Last updated on February 2nd, 2018

It’s no secret that fixed-rate mortgages have dominated the mortgage market in recent years, mainly because they’re just so darn cheap.

They’ve been breaking records left and right thanks to the bleak economic outlook and the Fed’s continued buying of mortgage-backed securities.

But they aren’t the only types of home loans benefiting – unfashionable adjustable-rate mortgages are also super cheap, even those that feature a fixed portion for several years.

Initial Rates on ARMs Lowest in History

initial_ARM_rates

In fact, initial-period rates on ARMs are the lowest in Freddie Mac’s Annual Adjustable-Rate Mortgage (ARM) Survey, which is now in its 29th year.

By initial-period rate, Freddie means the teaser rates that mortgage lenders offer to borrowers for taking an ARM as opposed to a safer, more secure fixed mortgage.

You see, most ARMs are hybrids, meaning they’re fixed for some period of time before becoming adjustable for the rest of the loan term.

They’re all tied to some mortgage index, whether it’s the LIBOR or the MTA, the latter being the Monthly Treasury Average, which covers 69% of ARMs nowadays.

The most common adjustable home loan is the 5/1 ARM, which is fixed for the first five years and annually adjustable for the remaining 25 years.

In early January, it averaged 2.75%, a 0.65% discount relative to the almighty 30-year fixed, which stood at 3.40%.

For a borrower with a $250,000 loan amount, the 5/1 ARM would result in monthly savings of nearly $90.

[Fixed Mortgage vs. ARM]

Of course, it would only offer such savings for the first 60 months, after which anything goes! Well, within the mortgage caps that limit how much ARMs can move…

But still, that $90 over five years would result in more than $5,000 in mortgage payment savings, which is surely nothing to scoff at.

Assuming the 5/1 ARM presented too much risk, a borrower could go with a 7/1 ARM, which is fixed for an entire seven years.

The initial rate on the 7/1 averaged 2.97% in January, which was still nearly a half a percentage point below the 30-year fixed.

It would provide even more breathing room for the borrower willing to “take a chance,” especially seeing that most homeowners move, refinance, or prepay around the 7-year mark.

Or if seven years isn’t enough, there’s always the 10/1 ARM, which as the name implies, is fixed for an entire decade before going rogue (adjustable).

The 10-year stood at 3.29% earlier this month, which was only an 11 basis point discount to the 3.40% average on the 30-year fixed.

Probably doesn’t make a whole lot of sense given the fact that you could still be in your home/mortgage after 10 years.

In any case, the initial rates on these two types of ARMs decreased by 0.32 and 0.57 percentage points, respectively, compared to last year.

Finding the Sweet Spot

If you really want to take a chance in this low mortgage rate environment and snub the 30-year fixed, you’ve got to do some homework to determine how long you’ll need the protection of the fixed-rate period.

Assuming five years is ample time to “flip” your property and move on, it could make sense to take a chance (Facebook founder Zuckerberg has an ARM).

But if you need more, the 7/1 ARM might be a good candidate as well. The 10/1 is so close to the 30-year that you’re kind of splitting hairs, and you probably don’t want to sit in bed every night counting down the days.

After all, time can fly when you don’t want it to…

For the record, there are also even shorter ARMs, such as the 3/1 and the one-year adjustable, which clearly don’t stay fixed for long. And seeing that their initial discounts aren’t too hot, they also don’t make much sense.

At the moment, ARMs are cheap, but there’s a reason I referred to them as “bad news” not too long ago.

They aren’t for the faint of heart, and with so much uncertainty ahead, the comfort of a very low fixed loan may just be worth the minimal extra cost.

During 2012, ARMs accounted for one-in-ten new purchase mortgages, per FHFA data. Freddie sees them grabbing a 12% market share in 2013.

(photo: Elvert Barnes)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

The Fed Minutes and Mortgage Rates

Just a few short hours ago, the Federal Reserve released the hotly anticipated FOMC “minutes” from its two-day meeting that took place back on April 30th and May 1st, 2013.

The contents weren’t all that exciting, though they seemed to be enough to result in a 200+ point stock market swing.

The markets opened considerably higher this morning, only to take a beating after the minutes were released, with the Dow falling roughly 80 points.

What Was Said at the Meeting?

  • The Fed basically said inflation was stable
  • Which meant they didn’t need to raise key interest rates
  • Because the economy is still questionable
  • But if and when the economy heats up they’ll change their tune

In a nutshell, the Fed said economic growth expanded moderately in the first quarter, unemployment edged lower (but employment growth slowed), and consumer price inflation remained low, with expectations for future inflation stable.

Put simply, there wasn’t all that much drama in the economy during the first quarter, and things appear to be on track, albeit not a fast track to anywhere good or bad.

The Fed didn’t even seem to express any excitement about recent developments in the housing market, highlighting the decline in existing home sales in March alongside rising prices.

For the record, those sales were revised upward today by the National Association of Realtors, and April existing home sales were the highest since November 2009, when the homebuyer tax credit gave the market a temporary boost.

Anyway, the takeaway is that the Fed isn’t yet convinced that the economy is good to go. It will take months of solid and convincing improvement for the Fed to taper its accommodative monetary policy.

That said, the Fed voted to continue its purchases of mortgage-backed securities (MBS) at a pace of $40 billion per month, and longer-term Treasury securities at a pace of $45 billion per month.

[What QE3 means for mortgage rates.]

Isn’t This Good News?

  • Mortgage rates are lower than usual
  • Thanks to the Fed’s MBS buying program, but it’s not going to be around forever
  • And once they stop buying mortgages we could see mortgage rates jump
  • Thanks to increased supply and an overall indication that the economy is strong enough to end the program

If the Fed continues to buy Treasuries and MBS, mortgage rates should stay low, right? After all, if demand for mortgages is strong, prices will rise, and yields (and rates) will fall.

Well sure, that logic is sound, but the Fed’s MBS purchase program is nothing new, and the fear of losing it after everyone got so accustomed to it is unnerving to say the least.

And guess what – the minutes revealed that some of the participants (unclear how many) “expressed willingness” to lower the rate of purchases as early as the Fed’s June meeting.

Meanwhile, one participant recommended deceasing the rate of purchases immediately, while another suggested shifting purchases away from MBS and over to Treasuries in light of the recent housing recovery.

In other words, there is increasing pressure on the Fed to slow (or end) its purchases of MBS, which will inevitably lead to higher mortgage rates.

And that day seems to be getting closer and closer as more and more positive economic reports are released.

Sadly, mortgage rates are already at or near 2013 highs, so if the Fed really decides to pump the brakes and slow their MBS purchases, 30-year fixed mortgage rates could say goodbye to the 3% range and settle in above 4%.

Of course, we might be fearing the worst for no apparent reason other than fear itself.

In prepared remarks before Congress this morning, Fed chairman Ben Bernanke didn’t seem to indicate any decisive action on the Fed’s behalf.

Rather, he noted that prematurely withdrawing policy accommodation before there is a clear sign of a recovery could do a lot more harm than good.

And let’s face it; there will be plenty of bumps in the road to recovery. Just look at the latest weekly numbers from the Mortgage Bankers Association, which revealed that mortgage applications declined 10% week-over-week.

Additionally, the refinance index has declined nearly 20% over the past two weeks to its lowest level since March.

Clearly the Fed won’t want to do anything drastic enough to derail the housing market, which after more than five terrible years has finally displayed a few months of solid gains.

Still, the Fed can only do so much to control mortgage rates, and as the economy continues to improve, rates will have nowhere to go but up.

Read more: Mortgages vs. inflation

(photo: Lyra Jaye)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Social Security Recipients to Get Third Stimulus Check Next Week

Millions of seniors who didn’t file a 2019 or 2020 tax return could receive a third stimulus check next week. After receiving data from the Social Security Administration (SSA) on March 25, the IRS says it has already started reviewing, validating, and testing the information needed to process third stimulus payments for approximately 30 million seniors. Assuming there are no problems, the IRS expects to finish that work and begin processing payments by the end of this week. These seniors will generally get their stimulus payment in the same way they get their regular Social Security benefits. Since most of these payments will be paid electronically through direct deposits or to existing Direct Express debit cards, the funds should be available on April 7 for many seniors.

Third stimulus payments are generally based on information found on your 2019 or 2020 tax return. However, since some Social Security recipients don’t file tax returns, the IRS didn’t have the necessary information in its computer systems to process third-round stimulus payments. That’s why the tax agency needed data from the SSA to send out checks to seniors who haven’t file a recent tax return.

Many people who receive Social Security benefits who filed a 2019 or 2020 return, or who used the IRS’s Non-Filers tool last year, already received a third stimulus check. The IRS’s statement about payments arriving on April 7 applies to people receiving Social Security, Supplemental Security Income (SSI), or Railroad Retirement Board (RRB) benefits who didn’t file a 2019 or 2020 tax return or didn’t use the Non-Filers tool. The IRS is still reviewing data received from the Department of Veterans Affairs for people who receive VA benefits, so payments to them will come later.

Most Social Security, SSI, and RRB beneficiaries who are eligible for a third stimulus check don’t need to take any action to receive a payment (not everyone is eligible). However, as with previous stimulus payments, some beneficiaries may need to file a 2020 tax return – even if they don’t usually file – to provide the IRS the information it needs to send an additional $1,400 for any dependents. The deadline for filing a 2020 tax return has been pushed back from April 15 to May 17, 2021.

[Stay on top of all the new stimulus bill developments – Sign up for the Kiplinger Today E-Newsletter. It’s FREE!]

Amount of Your Third Stimulus Check

Every eligible American will receive a $1,400 third stimulus check “base amount.” The base amount jumps to $2,800 for married couples filing a joint tax return. You also get an extra $1,400 for each dependent in your family (regardless of the dependent’s age).

Not everyone will receive the full amount, though. As with the first two stimulus payments, third-round stimulus checks will be reduced – potentially to zero – for people reporting an adjusted gross income (AGI) above a certain amount on their latest tax return. If you filed your most recent tax return as a single filer, your third stimulus check will be phased-out if your AGI is $75,000 or more. That threshold jumps to $112,500 for head-of-household filers, and to $150,000 for married couples filing a joint return. Third-round stimulus checks will be completely phased out for single filers with an AGI above $80,000, head-of-household filers with an AGI over $120,000, and joint filers with an AGI exceeding $160,000.

You can use our handy Third Stimulus Check Calculator to get a customized estimated payment amount. All you have to do is answer three easy questions.

How to Track the Status of Your Third Stimulus Check

The IRS’s “Get My Payment” tool lets you track your third stimulus check payment. The online portal lets you:

  • Check the status of your stimulus payment;
  • Confirm your payment type (paper check or direct deposit); and
  • Get a projected direct deposit or paper check delivery date (or find out if a payment hasn’t been scheduled).

However, according to the IRS, the tool won’t be updated until the weekend of April 3 – 4 with information for Social Security recipients expecting payments next week.

For more information about the tool, see Where’s My Stimulus Check? Use the IRS’s “Get My Payment” Tool to Get an Answer.

Source: kiplinger.com

Everything You Need to Know About Taxes on Investment Income

Taxes on investment income can be confusing, especially since there are several ways investment income is taxed. An investor may be familiar with capital gains taxes—the taxes imposed when one sells an asset that has grown—but less clear on the implications of dividends, interest, and other ways in which investments have tax implications.

Certain types of investment vehicles—529 plans, retirement plans like 401(k)s and IRAs—are either not taxed until money is taken out of the account, or may not ever be taxed, depending on the reason and timing for taking money from the account. But general investing accounts come with tax liabilities.

Being well aware of all the tax liabilities your investments hold can minimize headaches and help you avoid a surprise bill from the IRS. Working with a professional can be helpful as an investor’s portfolio grows, or as they find themselves selling assets to fund a purchase, like the down payment on a home. But for all investors, it makes sense to familiarize yourself with the different types of taxes on investment income and some potential strategies investors use to limit taxes.

Types of Investment Income Tax

There are several types of taxes on investments. These include:

•  Dividends
•  Capital Gains
•  Interest Income
•  Interest income
•  Net Investment Income Tax (NIIT)

Taking a deeper look at each category can help you assess whether—and what—you may owe.

Tax on Dividends

Dividends are distributions that are sometimes paid to investors who hold a stock or otherwise have an interest in a partnership, trust, S-corp, or other entity taxable as a corporation. Dividends are generally paid in cash, out of profits and earnings from a corporation.

Some dividends are ordinary dividends, and are taxed at the investor’s income tax rate. Others, called qualified dividends, are typically taxed at a lower capital gains rate (more on that in the next section). Briefly, the distinction between the two is that stocks that are held for a short period of time are typically subject to a higher tax rate, while stocks held for a longer period of time are typically subject to the lower tax rate. For the full details, the IRS offers information on qualified and non-qualified dividends .

Generally, an investor should expect to receive form 1099-DIV from the corporation that paid them dividends, if the dividends amounted to more than $10 in a given tax year.

More About Capital Gains Tax

Capital gains are the profit an investor makes between the price of an asset when purchased, versus the price of an asset when sold. Capital gains taxes are the taxes levied on the net gain between purchase price and sell price.

There are two types of capital gains taxes: Long-term capital gains and short-term capital gains. Short-term capital gains apply to investments held less than a year, and are taxed as ordinary income; long-term capital gains are held for longer than a year and are taxed at the capital-gains rate (for 2021, the
IRS rates are no higher than 15% for most individuals, $0 if your taxable income is less than $80,0000)

The opposite of capital gains are capital losses—when an asset loses value between purchase and sale. Sometimes, investors use losses as a way to offset tax implications of capital gains. Capital losses can also be “carried forward” to future years, which is another strategy that can help lower an overall capital gains tax.

Capital gains and capital losses only become taxable once an investor has actually sold an asset. Until you actually trigger a sale, movement in your portfolio is called unrealized gains and losses. Seeing unrealized gains in your portfolio may lead you to question when the right time is to sell, and what tax implications that sale might have. Talking through scenarios with a tax advisor may help spotlight potential avenues to mitigate tax burdens.

Taxable Interest Income

Interest income on investments are taxable at an investor’s ordinary income level. This may be money generated as interest in brokerage accounts, or interest from assets such as bonds or mutual funds. The only exception are investments in municipal (muni) bonds, which are exempted from federal taxes and may be exempt from state taxes if they are issued within the state you reside.

Interest income (including interest from your bank accounts) is reported on form 1099-INT from the IRS. Tax-exempt accounts, such as a Roth IRA or 529 plan, and tax-deferred accounts, such as a 401(k) or traditional IRA, are not subject to interest taxes.

Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT), now more commonly known as the “Medicare tax”, is a 3.8% flat tax rate on investment income for taxpayers whose adjusted gross income (AGI) is above a certain level—$200,000 for single filers; $250,000 for filers filing jointly. As per the IRS, this tax applies to investment income including, but not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

For taxpayers with an AGI above the required thresholds, the tax is paid on the lesser of the taxpayer’s net investment income or the amount the taxpayer’s AGI exceeds the AGI threshold.

For example, if a taxpayer makes $150,000 in wages and earns $100,000 in investment income, including income from rental properties, their AGI would be $250,000. This is $50,000 above the threshold, which means they would owe NIIT on $50,000. To calculate the exact amount the taxpayer would owe, one would take 3.8% of $50,000, or $1,900.

Tax-Efficient Investing

One way to mitigate the effects of investment income is to create a set of tax efficient investing strategies. These are strategies that can minimize the tax hit that you may experience from investments and allow you to grow your wealth. These strategies can include:

•  Diversifying investments to include investments in both tax-deferred and tax-exempt accounts. An example of a tax-deferred account is a 401(k); an example of a tax-exempt account is a Roth IRA. Investing in these vehicles may be a strategy for long-term growth as well as a way to ensure that money is earmarked for certain purposes. While these are commonly thought of as retirement vehicles, there are other times when they may be tapped. For example, funds in a Roth can be used for qualified education expenses.
•  Exploring tax-efficient investments. Some examples are municipal bonds, exchange-traded funds (ETFs), treasury bonds, and stocks that do not pay dividends.
•  Considering tax implications of investment decisions. When selling assets, it can be helpful to keep tax in mind. Some investors may choose to work with a tax professional to help offset taxes in the case of major capital gains or to assess different strategies that may have a lower tax hit.

The Takeaway

SoFi Invest®, our dedicated team of financial planners is available to help members map out their financial goals. What’s more, investors can choose to take full charge of their investments—whether stocks, crypto, retirement accounts, and more—or use automated investing for a more hands-off approach.

Find out how to get started with SoFi Invest.


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