The U.S. Bureau of Labor Statistics estimates that Americans change jobs about 10 times between the ages of 18 and 42. If job changers had a 401k account at just half of those positions, it would represent a significant money management challenge: multiple redundant investment portfolios and a mountain of account statements and investment documentation to sort through.
One flexible solution to simplify the task is to consolidate assets under a single account umbrella via a 401k rollover to IRA. Offered by many financial institutions, the rollover IRA can help you streamline your investments into a unified asset allocation plan. (Remember: In addition to 401k’s, this could also include 403b’s, 457’s, Pension Plans, Simple and SEP IRA’s)
If you enjoyed this article be sure to check out: How to Rollover Your 401k into a Roth IRA, Consolidate Retirement Assets with a Super IRA, How to do an In-Service 401k Distribution While You’re Still Working.
401k to Rollover IRAs Offer a Wide Range of Benefits
As compared with employer-sponsored retirement accounts, a rollover IRA can provide a broader range of investment choices and greater flexibility for distribution planning. Consider the following benefits rollover IRAs offer over employer-sponsored plans:
Simplified investment management. You can use a single rollover IRA to consolidate assets from more than one retirement plan. For example, if you still have money in several different retirement plans sponsored by several different employers, you can transfer all of those assets into one convenient rollover IRA.
More freedom of choice, control. Using a rollover IRA to manage retirement assets after leaving a job or retiring is a strategy that’s available to everyone. And depending on the financial institution that provides the rollover IRA, you could have a wide array of investment choices at your disposal to help meet your unique financial goals. As the IRA account owner, you develop the precise mix of investments that best reflects your own personal risk tolerance, investment philosophy and financial goals.
More flexible distribution provisions. While Internal Revenue Service distribution rules for IRAs generally require IRA account holders to wait until age 59½ to make penalty-free withdrawals, there are a variety of provisions to address special circumstances. These provisions are often broader and easier to exploit than employer plan 401k hardship withdrawal rules.
Valuable estate planning features. IRAs are more useful in estate planning than employer-sponsored plans. IRA assets can generally be divided among multiple beneficiaries, each of whom can make use of planning structures such as the stretch IRA concept to maintain tax-advantaged investment management during their lifetimes.In addition, IRS rules now allow individuals to roll assets from a company-sponsored retirement account into a Roth IRA, further enhancing the estate planning aspects of an IRA rollover. By comparison, beneficiary distributions from employer-sponsored plans are generally taken in lump sums as cash payments.
Efficient Rollovers Require Careful Planning
There are two ways to execute a 401k Rollover to IRA — directly or indirectly. It’s important you understand the difference between the two, because there could be some tax consequences and additional hurdles if you aren’t careful. With a direct rollover, the financial institution that runs your former employer’s retirement plan simply transfers the money straight into your new rollover IRA. There are no taxes, penalties or deadlines for you to worry about.
With an indirect rollover, you personally receive money from your old plan and assume responsibility for depositing that money from the 401k into a rollover IRA. In this instance, you would receive a check representing the value of the assets in your former employer’s plan, minus a mandatory 20% federal tax withholding. You can avoid paying taxes and any penalties on an indirect rollover if you deposit the money into a new rollover account within 60 days.
You’ll still have to pay the 20% withholding tax and potential penalties out of your own pocket, but the withholding tax will be credited when you file your regular income tax, and any excess amount will be refunded to you. If you owe more than 20%, you’ll need to come up with the additional payment when you file your tax return.
Potential Downsides of IRA Rollovers
While there are many advantages to consolidated IRA rollovers, there are some potential drawbacks to keep in mind. Assets greater than $1 million in an IRA may be taken to satisfy your debts in certain personal bankruptcy scenarios. Assets in an employer-sponsored plan cannot be readily taken in many circumstances.
Also, with a traditional IRA rollover, you must begin taking distributions by April 1 of the year after you reach 70½ whether or not you continue working, but employer-sponsored plans do not require distributions if you continue working past that age. (Roth IRAs do not require the owner to take distributions during his or her lifetime.)
Remember, the laws governing retirement assets and taxation are complex. In addition, there are many exceptions and limitations that may apply to your situation. Before making any decisions, consider talking to a financial advisor who has experience helping people structure retirement plans.
Tax law is complicated. There’s no doubt about it. But oddly enough, a lot of the tax mistakes people make are for shockingly simple things that could easily be avoided. (Some examples include missing the tax deadline, failing to report all your income, and not taking the right tax breaks, just to name a few).
Understanding these mistakes can help you avoid them in the future, since none of us really want to deal with the IRS more than we have to.
What’s Ahead:
1. Not paying required estimated taxes
If you’re a freelancer, small business owner, side hustler, or anyone else earning income where taxes aren’t withheld, you’re required to make quarterly estimated tax payments to the Internal Revenue Service (IRS).
Not paying required estimated taxes or paying them late has two major outcomes:
Your tax bill will be a lot larger than anticipated.
You’ll pay penalties and interest charges on your unpaid tax liability.
Either way you dice it, it’s not good. Work those quarterly payments into your schedule so you can breeze into tax season knowing you won’t be in trouble with Uncle Sam.
Read more: 7 Side Hustle Accounting Mistakes To Avoid
Who has to pay quarterly estimated taxes?
Generally speaking, if you owe $1,000 or more in federal taxes for the year, then you’ll need to pay quarterly estimated tax payments. This could include any income earned through:
Self-employment
Interest
Dividends
Alimony
Capital gains
Prizes and awards
Read more: Quarterly Estimated Tax Payments: Who Needs to Pay Them, When, and Why
2. Failing to keep necessary tax records
No matter how simple or complex your tax situation is, you’re going to need to collect receipts, income statements, and other things throughout the year to make sure you have everything you need to file your return.
So, what documents do tax preparers need to keep? In general, you should hang onto:
Income statements such as W2s and 1099s.
Bank statements.
Any tax forms you receive electronically or by snail mail.
Receipts for purchases and charitable donations you plan on writing off.
Copies of your signed return and all supporting documents, so you have proof if you’re audited or need to file an amended return.
If this sounds like a lot, don’t panic. You can use our tax document checklist to keep it all organized.
3. Failing to report all of your income
The IRS knows how much money you make each year — and they also know when you fail to report it all. (They’re kind of like that parent who knows their kid broke their favorite vase but they ask them about it anyway just to give them a chance to come clean and tell the truth).
If you accidentally or purposefully leave something off your return, the IRS will know about it, and there will be consequences to pay. It could be as simple as paying a penalty fee or as extreme as being audited or facing tax fraud charges. Either way, it’s best to avoid it all together.
The easiest way to make sure you’re reporting all your income for the year is to hang onto all your W2s and 1099s. This will help you make sure nothing falls through the cracks when you sit down to prepare your return.
MU30 Tip: If you file your taxes and later realize you forgot to report something, file an amended return as soon as you can to fix it. Learn how in our piece – Tax Return Error? Here’s How To Amend Your Return.
4. Not using accounts that have tax advantages
One of the easiest ways to lower your tax bill is by maxing out any tax-advantaged accounts you have at your disposal. This includes:
Employer-sponsored retirement accounts, such as a 401(k), 403(b), 457 plan, or a federal Thrift Savings Plan (TSP).
Traditional IRAs.
Health savings accounts (HSAs), which you qualify for if you have a high deductible healthcare plan (HDHP).
So, why should use tax-advantaged accounts to lower your taxes? Here’s a scenario to show you why. (It involves some math, so put your nerdy glasses on with me for a second).
A real-life example of why you should use tax-advantaged accounts
Meet Cleo. She’s a single, 28-year-old financial analyst who made $80,000 in 2022. Cleo’s big into saving, so she maxed out her company’s 401(k) ($20,500), her traditional IRA ($6,000), and her HSA ($3,650). This brings her taxable income down to $50,900.
Based on current marginal tax rates, her federal tax liability comes out to $3,650 for the year. Without the tax-advantaged accounts, Cleo would’ve been on the hook for $10,368 — A LOT more money.
Note that this is a simplified scenario that uses the standard deduction but doesn’t take into account other credits or expenses.
5. Filing with incorrect information
Another common tax mistake is filing a return that’s incomplete or inaccurate. This can result in delays in getting your refund, as well as additional penalties and interest charges from the IRS.
To avoid this, be sure to:
Double-check your bank account and routing numbers if you’re getting a tax refund via direct deposit.
Review your name, Social Security number, address, and other personal information.
Make sure your filing status is correct.
Confirm that your income matches the W2s and other income statements you have on hand.
Review your deductions and credits to see if they make sense for your situation.
6. Filing under the wrong status
Your filing status can have a huge impact on how much you owe in taxes for the year. It can also determine if you even need to file a return in the first place.
So, what happens if you file under the wrong tax status?
The most common downside is that it could result in a larger tax bill than necessary. And if the IRS suspects you were intentionally deceptive, you could be audited or hit with a tax fraud penalty.
What are your tax status filing options?
Tax filers have five filing statuses to choose from:
Single – Applies to anyone who isn’t married, including those who are divorced or legally separated.
Married filing jointly – Applies to anyone who’s married and wants to file taxes together.
Married filing separately – Applies to married couples who want to file taxes separately. This could be advantageous if you only want to be responsible for your own taxes. Or, if filing under this status will save you more money.
Head of household – Mostly for those who are single, but it can also be used if you pay for more than 50% of the costs for you and a qualifying person.
Qualifying widow(er) with dependent child – For anyone whose spouse has recently died and has at least one child dependent. Special rules apply, though.
If you’re stuck between two filing statuses, the IRS recommends preparing your return both ways to see which saves you the most money.
Read more: How To Know When You Should File Your Taxes Jointly or Separately
7. Not taking the right tax breaks
There are HUNDREDS of tax deductions and credits out there. Some are quite common — like the earned income tax credit, child tax credit, and property tax deduction.
Others are super obscure — like how you can write off student loan interest paid by your parents. Or, how you can write off taxes paid to the Social Security Administration if you’re self-employed.
Read more: Tax Benefits For College Students: How To Pay Less And Get More Back
One of the best ways to reduce your taxes is to take advantage of every tax break you qualify for. The good news is, if you file your taxes online, the tax software you use will automatically maximize these deductions and credits for you.
Check out a few of our recommended tax software options here: Best Tax Software Compared
8. Missing the tax deadline
The tax filing deadline is April 15 (almost) every year (or October 15 if you file an extension). But in 2023, it’s April 18 due to a state holiday. One of the most common tax mistakes people make is missing this deadline.
So, what happens if you miss a tax deadline?
If you’re set to receive a refund: the short answer is nothing. You can file your tax return at any time and get your money. You won’t pay any penalties or fees.
If you owe the IRS money: you’ll pay a penalty for filing a late return and for not paying your taxes on time. This penalty gets larger the longer you wait, so file your return ASAP if you can.
The IRS’ Failure to File Penalty is 5% each month for any unpaid taxes owed. This fee maxes out after five months for a total of 25%. There’s also a Failure to Pay Penalty that keeps accruing each month even after the Failure To File Penalty stops. It can all add up in a hurry.
MU30 Tip: A tax extension gives you more time to file your return, but it does not give you more time to pay any taxes you owe. So, if you have a bill this tax year, set up a payment plan by the deadline even if you haven’t filed a return yet.
9. Filing your tax return too early
If you’re anything like me, you may be in a hurry to file your taxes as soon as possible each year. Especially if you’re set to get a refund.
Side story: I remember so many times in college when I treated the first day of tax season like my birthday or Christmas. I’d wake up and file my return as quickly as I could because I was so excited to see what my return would be. Weird, I know.
But here’s the catch — another easy tax mistake people make is filing their return too soon. Sounds odd, right?
When you file your return too soon, you run the risk of not having all the proper tax documents you need to file a complete and accurate return. You could also miss out on valuable deductions and credits and that could maximize your refund even more.
What you should do if you make a mistake on your tax return
Okay, so what happens if you file your return and then realize, “Crap! I’ve made a mistake!”? Calm down and take a deep breath. We’re gonna get through this.
In most cases, all you need to do is file Form 1040X, which is an amended tax return, to correct any mistakes you made.
You can typically amend your return using the same tax software or company you used to file it the first time. Or, you can download this form from the IRS and fill it out by hand (although this is a lot more tedious).
Summary
These are just a few of the most common tax mistakes people make each year. The IRS doesn’t always make things easy for us, so there are some things that are just honest mistakes.
One easy way to minimize these mistakes is to file electronically using tax software or a tax professional.
A wash sale occurs when an investor sells a security at a loss, and buys a very similar security within a 30-day window of the sale (30 days before or after). The wash-sale rule is an Internal Revenue Service (IRS) regulation that states an investor can’t receive tax deduction benefits if they sell an investment for a loss, then purchase the same or a “substantially identical” asset within 30 days before or after the sale.
While investors may find themselves in a position in which it may be beneficial to sell securities to harvest losses, it’s important to know the wash-sale rule in and out to avoid triggering penalties.
Which Investments are Subject to the Wash-Sale Rule?
The wash-sale rule applies to most common investments, including:
• Stocks
• Bonds
• Mutual funds
• Options
• Exchange-traded funds (ETFs)
• Stock futures contracts
Transactions in an individual retirement account (IRA) can also fall under the wash-sale rule. The wash-sale rule does not apply to commodity futures or foreign currency trades. The rule also applies if an investor sells a security that has increased in value and within 30 days buys an identical security. They will need to pay capital gains taxes on the proceeds.
What Happens When You Trigger a Wash Sale?
Investors commonly choose to sell assets at a loss as part of their tax or day trading strategy, or they may regret selling an asset while the market was down, and decide to buy back in.
The intent of the wash-sale rule is to prevent investors from abusing the tax benefits of selling at a loss, and claiming artificial losses.
In the event that an investor does trigger a wash sale, they will not be allowed to write off the loss when they do their tax reporting to the IRS. This means the investor won’t receive any tax benefit for selling at a loss. The rule still applies if an investor sells an investment in a taxable account and buys it back in a tax-advantaged account, or if one spouse sells an asset and then the other spouse purchases it that also counts as a wash sale.
It’s important for investors to understand the wash-sale rule so that they account for it in their investment and tax strategy. If investors have specific questions, they might want to ask their tax advisor for help.
Recommended: Investing 101 for Beginners
Avoiding a Wash Sale
Unfortunately, the guidelines regarding what a “substantially identical” security is are not very specific. The easiest way to avoid wash sales is to create a long-term investing strategy involving few asset sales and not trying to time the market. Creating a diversified portfolio is generally a good strategy for investors.
Another important thing to keep in mind is the wash-sale rule applies across an investor’s accounts. As such, investors need to keep track of their sales and purchases across their entire portfolio to try and make sure that the wash-sale rule doesn’t affect any investment choices.
What to Do After Selling an Asset at a Loss
The safest option is to wait more than 30 days to purchase an asset after selling a similar one at a loss. An investor can also invest funds into a different asset–a different enough asset, that is–for 30 days or more and then move the funds back into the original security after the wash sale window has passed.
There are benefits to selling an asset at either a profit or a loss. If an investor sells at a profit, they make money. If they sell at a loss, they can declare it on their taxes to help offset their capital gains or income. If an investor has significant capital gains to report, they may decide to sell an asset that has decreased in value to help lower their tax bill. However, if they hoped to reinvest in an asset later, a wash sale can ruin those plans.
In some cases, simply selling a stock from one corporation and purchasing one from another, different corporation is fine. Even selling a stock and buying a bond from the same company may not trigger a wash sale.
Investing in ETFs or Mutual Funds Instead
If an investor wants to reinvest funds in a similar industry while avoiding a wash sale, one option would be to switch to an ETF or mutual fund. There are ETFs and mutual funds made up of investments in particular industries, but they are often diversified enough that they wouldn’t be considered to be too similar to an individual stock or bond. It’s possible that an investor could sell an individual stock and reinvest the money into a mutual fund or ETF within a similar market segment without violating the wash-sale rule.
However, if an investor wants to sell an ETF and buy another ETF, or switch to a mutual fund, this can be more challenging. It may be difficult to figure out which ETF or mutual fund swaps will count as wash sales, and which won’t.
Wash-Sale Penalties and Benefits
If the IRS decides that a transaction counts as a wash sale, the investor can’t use the loss to reduce their taxable income or offset capital gains on their taxes for that year.
However, there can be an upside to wash sales. Investors can end up with a higher cost basis for their new investment, because the loss from the sale is added to the cost basis of the new purchase. In addition, the holding period of the sold investment is added to the holding period of the new investment.
The benefit of having a higher cost basis is that an investor can choose to sell the new investment at a loss and have a greater loss for tax reporting than they would have. Conversely, if the investment increases in value and the investor sells, they will have a smaller capital gain to report. Having a longer holding period means an investor may be able to pay long-term capital gains taxes on a sale rather than short-term gains, which have a higher rate.
The Takeaway
The wash-sale rule is triggered when an investor sells a security at a loss, but then turns around and buys a similar security within 30 days–either before, or after. It’s a bit of an opaque rule, but there can be consequences for triggering wash sales. That’s why understanding regulations like the wash-sale rule is an important part of being an informed investor.
Part of making solid investing decisions is planning for taxes and understanding what the benefits and downsides may be for any particular transaction. This is just one aspect of tax-efficient investing that investors might want to consider.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
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How much money does it take to start an IRA? The easy answer is $0, but that won’t get you on your way to growing your money into retirement. The truth is, you can start an IRA with very little money. The keys to really take advantage of the power of Roth IRAs or Traditional IRAs are to understand your eligibility, the rules, and to consistently add to your account over time.
IRA’s are easy to start. Just open up a great online brokerage account. My personal favorite right now is M1 Finance.
Keep in mind that there are actually two main types of IRAs to consider, so make sure you understand which one you are eligible for.
Table of Contents
Which IRA Am I Eligible For – Traditional or Roth?
Virtually anyone can contribute to an IRA, Roth or traditional. The most basic requirement is that you have earned income. The difference between the two is based on when you’ll pay taxes.
A traditional IRA allows you to grow your money tax-free over time. You won’t pay income taxes on your account until you begin taking distributions in retirement age, or when you’re at least 591/2. You may be able to deduct your contributions on your taxes if you meet specific filing status and income requirements.
With a Roth IRA, on the other hand, you’ll contribute income that has already been taxed, so you don’t get a tax deduction right off the bat. Your money will grow tax-free, however, and you won’t have to pay income taxes on your account once you begin taking distributions in retirement.
Here is a tool to help figure out what type of IRA you’re eligible for:
Traditional IRA
Roth IRA
Contribution Limits
$6,500 total across all IRAs in 2023; if you’re ages 50 and older, you can contribute an additional $1,000
$6,500 total across all IRAs in 2023; if you’re ages 50 and older, you can contribute an additional $1,000
Who Can Contribute?
Anyone who earns an income and is under the age of 70 1/2
Anyone who earns an income
Do Income Caps Apply?
Income caps limit who can deduct contributions on their taxes unless you don’t have a retirement plan through work
Income caps limit who can contribute
How Do Taxes Work?
You’ll pay taxes on distributions once you begin taking them in retirement
Your distributions will be tax-free once you reach retirement age
Who Is This Account Best For?
Anyone who can deduct contributions and wants to reduce their taxable income
Someone who wants tax-free income in retirement
Heads Up: no matter which type of IRA you choose (or if you contribute to both), you’ll face an IRA contribution limit for each tax year. In 2023, you can contribute up to $6,500 in total to an IRA if you’re under the age of 50. If you’re 50 or older, the limit is $7,500.
How Much Money Does it Take to Start an IRA?
Now you know what type of account to open, so how much do you invest? Technically, you don’t need anything to open an IRA since the Internal Revenue Service (IRS) doesn’t set minimum contribution limits — only annual maximums.
However, individual brokerage firms have minimum requirements and you want to employ a healthy contribution strategy to maximize rewards.
When it comes to your contributions, remember that the important thing is to just get started. Small amounts of money can add up over time, and from there, compound interest can do its magic and help your account balance balloon. Here’s one way to think about it:
IRAMonthly Contribution
IRA Annual Contribution
$5
$60
$10
$120
$25
$300
$50
$600
$100
$1,200
$200
$2,400
$500
$6,000
$541.67
$6,500
Let’s say you’re 30 years old, and you contribute $100/month for a total of $1,200 a year to your Roth IRA. By the time you’re 67 and ready to retire, you’ll have saved $204,000 that won’t be subject to income taxes. That can go a long way to support a happy retirement.
Now that you understand the process a bit more, figure out which brokerage firm to use for your IRA, and how much you need to actually open an account and get the ball rolling. Once your account is up and running, you can figure out how much to contribute regularly, whether that’s $100 per month or $100 per week.
How Much Does it Cost to Open an IRA?
The cost to open an IRA can vary depending on the financial institution or brokerage firm you choose. Some institutions may have no account opening fee, while others may charge a one-time fee or an annual fee. Some firms may also have minimum deposit requirements to open an account.
As an example, M1 Finance requires a $500 minimum investment in their Roth IRA. Depending on the mutual fund you choose, Vanguard requires at least $1,000 for their Target Retirement funds up to $3,000 for their other funds.
In addition to account opening costs, there may be ongoing fees associated with an IRA account, such as annual maintenance fees or fees for certain transactions. It is also important to note that while Traditional IRA or Roth IRA contributions may be tax deductible or not taxable but there are limits to how much you can contribute annually.
How to Start Investing in an IRA
1. Compare online brokerage firms that offer IRA accounts
Different online brokerage firms have features that you’ll want to pay attention to. Some are better for hands-off investing, while others are better for those who want to get their hands dirty and really dig in.
Here are some of the things you should ask yourself when choosing a brokerage:
Would you rather be hands-on or hands-off with your account? A robo-advisor may take the burden off you when it comes to managing your investments.
What sort of investments do you want to buy? Pay attention to limitations with the broker.
How much are you looking to invest off the bat? Fees and commissions can eat away at early earnings if the initial investment is too small.
Here are some of our favorite options:
$0 per trade
$0 mutual fund
$0 set up
0.25%-0.40% account balance annually
Open Account
Among the best brokerage accounts for beginners, we like M1 Finance for IRAs. You only need $100 to open an account with M1 Finance, which is a threshold most beginning investors can reach. M1 Finance IRAs also come with no hidden fees, the option to invest in fractional shares, and a helpful mobile app that lets you monitor your account growth no matter where you are.
2. Fund your account
Now it’s time to put the minimum amount in to fund your brand new account. As previously mentioned, different brokerages have different minimum requirements, so
3. Select your investment strategy
Your next step is building a system that will allow you to seamlessly build wealth over time. This means figuring out how much you can afford to invest in an IRA each month, but it also means choosing investments that will exist within your IRA.
Remember: Your IRA is nothing more than a retirement vehicle you can use to save and invest for the future. Once you open an IRA, you still have to choose the investments that do the work inside your account.
If you find you are able to deduct contributions to a traditional IRA because your employer doesn’t offer a retirement plan, you should strive to contribute as much as you can each month up to the $541.67 monthly (and $6,500 annual) limit. That way, you’re building up retirement funds in a hurry while maximizing tax advantages.
If you opt for a Roth IRA instead, you won’t get any tax advantages now, but you will later on since you won’t have to pay income taxes on distributions once you reach retirement age. Either way, the ultimate goal is striving to invest as much as you can each month up to account limits, and without harming your other financial goals.
In terms of selecting your portfolio, this component of your system depends a lot on which investment platform (brokerage firm) you choose to go with. If you choose an online broker and decide on stocks ask a key part of your portfolio, you could benefit from dollar-cost averaging. Here’s an example of dollar cost averaging into an individual stock with a fluctuating price:
BENEFITS OF DOLLAR COST AVERAGING
Month
Share Price (In $)
Shares Bought
January
15
3.3
February
13
3.8
March
12
4.2
April
14
3.6
May
13
3.8
June
12
4.2
July
13
3.8
August
14
3.6
September
16
3.3
October
16
3.1
November
17
2.9
December
16
3.1
Total Shares
42.7
Avg. Price Per Share
$14.25
Avg. Cost Per Share
$14.05
Some firms like M1 Finance let you set up “pies” of investments that are based on fractional shares.
With M1 Finance, you can build your own “pie” from more than 6,000 available stocks and funds, but you can also choose from “Expert Pies” that have been put together by in-house investment professionals.
That’s just one way this can work, but there are plenty of other ways to set up a portfolio depending on the firm you choose. For example, let’s imagine you decide to open an IRA with Betterment.
Betterment is a robo-advisor that helps you formulate an investment plan based on your age, your investing goals, and your risk tolerance. As a result, opening an IRA with Betterment is a breeze.
You’ll start by answering some basic questions about yourself, including your age, your income, and when you plan to retire. From there, Betterment will suggest a specific investment plan that is formulated to help you achieve your goals.
If you’re a knowledgeable investor who wants to select the stocks, bonds, ETFs, and other investments that live within your IRA, that’s perfectly okay, too.
Just remember that some brokerage firms will help create an investing plan for you based on how much you can invest and your long-term goals.
4. Make it automatic
To help in your effort to contribute consistently, and to remove some of the pressure, consider making your investments automatic with the click of a button. Many of the top brokerage firms let you set up automatic investments through their mobile apps or online platforms, including Betterment’s example below.
5. Check in regularly and stay on track
Part of the fun of putting away money for your future is watching it grow. Keep an eye on your portfolio to make sure you’re contributing the way you want to. It can be tempting during tighter financial times to stop contributing, but you can always reduce your contribution amount depending on your circumstances and then change it back later.
Don’t worry about small fluctuations and seek help from an advisor if necessary.
Know the IRA Rules
Whether you opt for a traditional IRA or a Roth IRA, you should know that plenty of rules dictate who can contribute, how much can be contributed each year, and whether contributions are tax-deductible.
With a Roth IRA, the rules are as follows:
Roth IRA contributions are made with after-tax dollars, so they are not tax-deductible.
Your money will grow tax-free until you reach retirement age, and you won’t pay income taxes on your distributions when you retire.
You can remove contributions to your Roth IRA from your account at any time before age 59 1/2, but you cannot take out any earnings without a penalty until then.
Married couples filing jointly can contribute the full amount to a Roth IRA provided their modified adjusted gross income (MAGI) is below $218,000. Those with incomes between $218,000 and $227,999 can contribute a reduced amount. Those with incomes over $228,000 cannot contribute.
Single tax filers can contribute the full amount to a Roth IRA provided their modified adjusted gross income (MAGI) is below $138,000. Those with incomes between $138,000 and $152,999 can contribute a reduced amount. Those with incomes over $153,000 cannot contribute.
With a traditional IRA, the rules are as follows:
Money invested in a traditional IRA grows tax-free. However, you will pay income taxes on distributions once you reach retirement age.
If you are covered by a retirement plan at work and you’re single, you can deduct contributions to a traditional IRA if your MAGI is below $73,000. You can claim a partial deduction if your MAGI is between $73,000 and $82,999. For those with incomes over that amount, contributions cannot be deducted on your taxes.
If you are covered by a retirement plan at work and you’re married filing jointly, you can deduct contributions to a traditional IRA if your MAGI is below $116,000. You can claim a partial deduction if your MAGI is between $116,000 and $135,999. For those with incomes over that amount, contributions cannot be deducted on your taxes.
If you are single and don’t have a retirement plan at work, you can deduct the full amount of your contributions to a traditional IRA regardless of your income.
If you’re married filing jointly and your spouse is covered by a retirement plan at work but you’re not, you can deduct the full amount if your MAGI is below $196,000. Those with MAGIs between $196,000 and $205,999 can deduct a reduced amount. Anyone with a MAGI of $206,000 or higher cannot deduct IRA contributions on their taxes.
And, as we mentioned already, both accounts come with an annual contribution limit of $6,500 for 2023. If you’re 50 or older, you can contribute an additional $1,000 for a total of $7,500.
Summary on How Much to Start a Roth IRA
Opening an IRA is a great way to save more money for retirement and the future, and that’s true whether you opt for a traditional IRA or a Roth IRA. Just remember that each type of IRA has pros and cons, and you’ll need to consider your tax situation now and what it might look like later.
Still, you shouldn’t get so caught up in the rules and minutiae of these accounts that you fail to open one altogether. Do some basic research then decide which brokerage firm will meet your needs the best. From there, open an account and start contributing as much as you can. The rest of the details will work themselves out, but only if you get started.
FAQs on How Much to Start a Roth IRA
What is the minimum amount needed to start a Roth IRA?
The minimum amount needed to start a Roth IRA varies depending on the financial institution where you open the account. Some institutions have no minimum deposit requirement, while others may require a minimum deposit of $500 or $1,000.
Can I withdraw my contributions from a Roth IRA without penalty?
Yes, you can withdraw your contributions from a Roth IRA without penalty at any time. However, if you withdraw earnings before age 59 1/2, it may be subject to taxes and penalties.
How to Make $500 a Month in Passive Income – SmartAsset
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You can produce $500 a month in passive income through savings accounts, certificates of deposit, stocks, bonds, funds and other investment vehicles. Each offers varying rates of return, degrees of safety, convenience, and liquidity. And each requires a significant initial investment to produce the required amount of passive income.
A financial advisor will be able to help with your investment decisions.
How to Make $500 a Month in Passive Income
Passive income generally refers to money you receive automatically without having to do anything such as work for wages. The most common way to generate passive income is through purchasing investments that pay you interest or dividends.
Producing passive income in this way calls for putting in money rather than putting in the effort. However, once you have invested the money, you can cash checks or receive deposits to your bank account without any intervention on your part.
And there are many investments you can make to produce $500 monthly in passive income. Here are some of the most accessible and reliable:
Savings Account
A bank or credit union savings account is as passive, safe and convenient as you can get. The top-paying savings accounts yield around 4.5% annually. At that rate, depositing approximately $133,333 will give you $500 monthly.
Certificates of Deposit
Certificates of deposit (CDs) are relatively safe, somewhat better-paying and a little less convenient than savings accounts. The best one-year bank certificates of deposit yield about 5% annually. So if you buy a $120,000 12-month CD, you’ll get about $500 in passive income each and every month.
Bonds
Corporate bonds are riskier than bank deposits. But AAA-rated bonds are generally considered safe and historically yield a little over 4%. If you buy $125,000 worth of AA-rated bonds, you can expect to receive the equivalent of $500 a month. That usually comes in quarterly, semi-annual or annual payments.
Dividend-paying Stocks
Shares of public companies that split profits with shareholders by paying cash dividends yield between 2% and 6% a year. With that in mind, putting $250,000 into low-yielding dividend stocks or $83,333 into high-yielding shares will get your $500 a month. Although, most dividends are paid quarterly, semi-annually or annually.
Diversified Securities Portfolio
A diversified securities portfolio of 60% stocks and 40% bonds has returned about 6.1% annually on average for the last decade, according to Vanguard. If future performance matches past performance, which is not guaranteed, $100,000 invested in a well-chosen 60/40 portfolio could grow by about $6,000 a year. The return includes dividends as well as price appreciation, so you may have to sell some of your investments to get $500 a month.
Exchange-Traded Funds
Low in cost and easy to buy, passively managed exchange-traded funds (ETFs) produce returns that vary according to whether they track stock, bond or other indexes. To cite one example, Vanguard’s High Dividend Yield ETF yields approximately 3%. You’d need to invest approximately $167,000 to get $500 a month in passive income from that ETF.
Real Estate
Purchasing shares of a Real Estate Investment Trust (REIT) is one popular way to get passive income from real estate. Publicly traded REITS pay dividends at an average rate of about 3%. So you’d need $167,000 to produce $500 in monthly passive income this way.
Other income opportunities that are somewhat less passive can also provide regular monthly income with varying amounts of effort. Drop shipping, for example, is a business model that involves setting up an online store and taking orders for products that pass directly to a supplier, who fulfills them without you having to do a thing except accept payment.
Direct investments in real estate, such as purchasing rental properties, can produce income that the internal revenue service (IRS) views as passive income, entitling it to more favorable tax treatment than earned income from working. However, managing residential real estate can involve considerable effort and attention on your part unless you pay a management company to take care of leasing, repairs and other tasks.
Bottom Line
To generate $500 a month in passive income you may need to invest between $83,333 and $250,000, depending on the asset and investment type you select. In addition to yield, you’ll want to consider safety, liquidity and convenience when selecting the investments you’ll employ to provide monthly passive income. However, once you’ve made the decision and put down your money, you can expect to receive regular payments without much, if any, additional future effort.
Tips for Investing
Financial advisors help investors analyze various investment options and can help create a plan of action to meet their goals. Before investing in any passive income investments, consider talking with an advisor to understand how it fits within your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When investing your money, it is important to diversify your assets among many different types of stocks and bonds. This helps you gain exposure to multiple sectors of the market and benefit from their growth. Our asset allocation calculator helps you select a profile that’s right for you based on your answers to simple questions.
Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
The Internal Revenue Service (IRS) has announced that it will resume issuing collections notices to taxpayers that were previously suspended during the COVID-19 pandemic. Here are some important points to note:
No date has been set for when the notices will be sent out, but the IRS has a detailed plan in place to stagger the issuance of different types of notices to avoid overwhelming the agency.
The IRS will communicate with taxpayers, tax professionals, and Congress on the timing of the plans to ensure that no one is caught off guard by the generation of notices.
The plan is to give most taxpayers a gentle reminder notice before sending a final Notice of Intent to Levy to avoid the appeals process and get taxpayers back into compliance.
The IRS will look at the totality of the 500-series of notices and taxpayers and their circumstances to see if there is a more efficient way of communicating and collecting past due amounts.
The agency has been working with National Taxpayer Advocate Erin Collins, who has offered input that the IRS is incorporating and taking into consideration every step of the way.
The staggered approach will help practitioners and the Taxpayer Advocate Service from being overwhelmed, as well as the IRS.
The IRS will start generating CP-14 notices, which are the statutory due notices, in the very near future, and these will be sent out to taxpayers around the end of May.
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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Update 12/12/22: You should see a manual adjustment for the missing More Rewards points. It’ll show as a separate line-item sometime at the end of November. For me it happened on November 25th, others are seeing November 28th.
Update 11/21/22: I was told by BofA Twitter support that everyone will be getting credited within 12 weeks for transactions that were processed on the 5th and are showing a later date. I’m just holding tight and hope it comes through automatically.
Transaction dates are provided to the bank by the merchant; however, this date may differ from when the merchant authorized a charge. As a courtesy, in addition to all charges with a transaction date of Nov. 5 being awarded an incremental <2%, 2 miles or 2 points>, the bank will also award the bonus on purchases that were authorized on Nov. 5 but have a transaction date later than Nov. 5. It may take up to 12 weeks for qualified courtesy adjustments to be applied.
I asked them whether they need my personal info to identify my account and issue the credit. They replied:
This will happen automatically. If after 12 weeks, you do not see the adjustment, please reach out so we can research your account farther.
Update 11/8/22: Bonus points are reflecting for most purchase. However, BofA apparently messed up for transactions posted near midnight and are not crediting bonus rewards, even for those transactions that clearly reflected as charged in the BofA system before midnight. For me, a transaction a little after 11pm got the bonus, but two transactions in the final 15 minutes of the day did not get rewards, despite both showing the pending transaction already before midnight. Others report that some transactions from earlier in the day are having this issue as well. I’ve reached out to BofA twitter support, we’ll see how those goes.
Update 11/5/22: Ends at 11:59pm Eastern Time (ET) on November 5, 2022
Update 11/4/22: This promo goes live tomorrow. Worth putting some thought into where you can pay out to maximize this deal. You might also want to pay down your BofA cards now to clear up the credit limits.
The Offer
Direct Link to offer
Bank of America is offering a one-day rewards holiday on Saturday, November 5, 2022 whereby all personal and business cards from Bank of America will earn an extra 2% cash back / 2x rewards points.
The Fine Print
No enrollment necessary.
The promotional offer is in effect 12:00am to 11:59pm Eastern Time (ET) on November 5, 2022. Only purchases that appear on your statement with a transaction date of November 5, 2022 will qualify. Transactions with delayed processing of 90 days or more will not be eligible to be included in the promotional offer.
This promotional offer applies to all purchases. Certain transactions, such as Cash Advances, Balance Transfers and Wire Transfers, are not considered retail purchases and do not apply for purposes of this offer. This offer will not apply to any customer bonus or account opening bonus.
This promotional offer is applicable to all Bank of America Consumer and Small Business credit cards that are open with active charging privileges on November 5, 2022.
Please allow up to 12 weeks after the promotional offer ends for the bonus rewards to be added to your account.
You may use all your available credit line. Please visit your account details in the Mobile Banking app or Online Banking to see your current available credit.
You will earn the Preferred Rewards bonus on the purchase amount(s). The Preferred Rewards bonus does not apply to the incremental bonus earn for this promotion.
The value of this reward may constitute taxable income to you. You may be issued an Internal Revenue Service Form 1099 (or other appropriate form) that reflects the value of such reward. Please consult your tax advisor, as neither we, nor our affiliates, provide tax advice.
Our Verdict
Interesting promotion, wow! If you have a card that already earns a competitive rate, this will make it even better. Some examples of where this can be a great deal:
The Travel Rewards, Premium Rewards, and Unlimited Cash Rewards cards earn 1.5% on all purchases. On November 5th you’ll get an extra 2% for 3.5% total everywhere.
This is especially interesting for top-tier Preferred Rewards relationship clients who always get 2.62% on all purchases with these cards and will get 4.62% everywhere on November 5th.
Bank of America Customized Cash Rewards card always gets 3% on one category of your choice (or 5.25% for Preferred Rewards clients) and 2% on grocery/wholesale (3.5% for Preferred Rewards clients) on up to $2,500 in purchases. On November 5th it’ll be 2% on top of that. That’s a potential total of 7.25% on your chosen category for top-tier Preferred Rewards clients.
Earn 3x miles per dollar everywhere on the Alaska Airlines card.
Apply for a new Bank of America card now and you’ll hopefully have the card by November 5th when you can meet the minimum spend at increased earn rates.
Let us know what other opportunities interest you
Some tips:
If you want to hit this hard, try getting your credit limit as high as possible in advance of November 5th.
Consider paying taxes with the credit card convenience fee of around 2% on November 5th and you’ll still come out ahead.
Pay out any utility bills, medical bills, insurance premiums, charity donations on November 5th.
Some people might want to manufacture spend, e.g. purchase $500 Visa gift cards, on November 5th.
Let us know your own suggestions in the comments below (we are aware that the comments aren’t working right now for most people).
What Is the Real Return of an Investment? – SmartAsset
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When measuring investment performance, it’s helpful to understand its real return. The real return on investment is what you earn after returns are adjusted for inflation and taxes. Nominal returns, on the other hand, don’t account for those deductions. Understanding the real return on investment matters, as it can tell you more accurately how much purchasing power it’s likely to yield.
You can talk to a financial advisor about how to create a strategic investment plan.
How Is Real Return Calculated?
Finding an investment’s real rate of return involves a fairly simple formula. Here’s an example:
To find the real rate of return on investment, you need to know the nominal rate and the inflation rate. The nominal rate is the stated interest rate or return that you can expect to earn on an investment. The inflation rate measures changes to the prices of consumer goods and services over time.
As a general rule of thumb, nominal rates are always higher than real return rates. That makes sense since the nominal rate doesn’t account for inflation or taxes. The nominal rate and the real rate of return may align more closely when inflation is close to or at zero, or the economy is experiencing a period of deflation, both of which are rarities.
Real Return Example
It’s easy to gauge the effects of real return, even if you’re not doing a step-by-step calculation. For example, let’s say that you deposit $20,000 into a CD. The bank is offering a 5% APY, which represents the nominal rate you could earn on your money. Over a 12-month period, you’d earn $1,000 in interest.
But what if the inflation rate is 2.5%? That cuts the purchasing power of the $1,000 in interest you earned in half. So now, that money is technically worth $500, which represents your real return.
That just accounts for the impact of inflation on your CD earnings. CD interest is considered taxable income by the internal revenue service (IRS), along with interest earned on other types of savings accounts. Once you factor in what you might owe in taxes on the interest, that can shrink your real return even further.
Are There Any Flaws With Real Return?
Calculating the real rate of return requires you to factor in taxes and inflation. That’s a good thing, as again, it can give you a more realistic picture of how much spending power a particular investment is generating.
There is, however, one thing that real return doesn’t account for. This formula doesn’t incorporate the fees you might pay to own an investment, and that can include:
Managing investment fees is important as those additional costs can detract from the total returns that you get to keep. Choosing tax-efficient investments, such as low-cost index funds or exchange-traded funds (ETFs) with a low asset turnover ratio, can help to minimize your fee expenses.
It’s also important to keep in mind that every investor’s tax situation is different and that inflation is not static. Even small changes to the tax code or slight increases in prices for consumer goods and services can have a significant impact on real return calculations.
How to Maximize Real Return
Getting the most return possible for your money is challenging, as certain factors may be outside of your control. While there are things you can do to pay less in fees for your investments, there’s not a whole lot that you can do directly to control inflation or changes to the tax code.
What you can manage is how you deal with the impact of both on your investments. With regard to inflation, that can mean choosing investments that tend to offer a higher rate of return overall. Stocks, for instance, can outperform certificates of deposit (CD) rates or money market funds. However, investing in stocks does carry more risk.
You can also choose investments that move with inflation or are otherwise inflation-proof. Real estate is a great example. Property tends to appreciate in value over time and when inflation goes up, rental prices can increase in tandem. If you’re renting a property out, then you can ride with the tide so to speak when it comes to how much you charge.
Minimizing the Effects of Taxation
In terms of taxation, there are a few strategies you can use to minimize the effects. Some of the best ways to save on taxes as an investor include:
Choosing longer-term investments, which are subject to the more favorable long-term capital gains tax rate.
Contributing to tax-advantaged accounts, such as 401(k) or individual retirement accounts (IRAs).
Allocating less tax-efficient assets, such as traditional mutual funds, to an IRA or 401(k).
Harvesting tax losses to offset capital gains.
Claiming all eligible deductions in order to shift into a lower tax bracket.
Bottom Line
Understanding real return is important when deciding how to invest money. The more purchasing power you have, the further your dollars can go. If you’re just looking at nominal returns, you can end up with a skewed sense of how much your investment might be worth. For example, say that you’re eyeing an investment that has delivered a 15% rate of return to investors over the last 10 years.
That sounds good but it doesn’t tell you how inflationary changes or updates to the tax code may have affected the earnings investors actually got to keep over that same period. It’s possible that once inflation rates and taxes are factored in, the net return is negative or zero. That’s something you’d like to know before you invest. Talking to a financial advisor can help you come up with a plan for managing taxes on investments so that you can get the best real return possible for your money.
Investing Tips
If you need help calculating the real return on investment, consider talking to a financial advisor. A financial advisor can walk you through the numbers when deciding what to include in your portfolio. And finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with three vetted financial advisors who serve your area. It takes just a few minutes to get your personalized advisor recommendations online. Get started now.
Many investors confuse an investment’s returns with its yield. You never have to make that mistake again, though. Learn the difference between these two key concepts, along with how a combination of strong yields and steady returns can help you meet your financial goals.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
Tax season is in full swing, and again this year, the Internal Revenue Service is offering a program that allows many U.S. taxpayers to electronically file their tax returns for free:
The Free File program provides free federal income tax preparation and electronic filing for eligible taxpayers through a partnership between the Internal Revenue Service and the Free File Alliance LLC, a group of private sector tax software companies. Many companies offer free or paid state tax preparation and efiling services. Some companies may not offer state tax preparation and e-file services for all states.
I’ve shared this service with GRS readers in the past, and will do so every year in the future (so long as the program exists). I think it’s awesome.
Doing taxes by hand is often tedious and confusing, and it can open you up to making costly mistakes. Using commercially available tax software will ease tax preparation for many Americans. If youâre an individual looking to file your taxes ⦠Continue reading â
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