Mega Millions has been getting the headlines lately, with a jackpot currently estimated at $735 million, but the jackpot for the other big national lottery game — Powerball — has also crossed the half-billion-dollar mark, with the next drawing set for tonight.
Powerball and Mega Millions tickets are sold for $2 apiece in 45 U.S. states, as well as Washington, D.C., and the U.S. Virgin Islands.
To play Mega Millions, pick five numbers between 1 and 70, and a sixth number between 1 and 25. If you don’t want to pick the numbers yourself, you can get a set of numbers generated for you.
To play Powerball, pick five numbers between 1 and 69 and a Powerball number from 1 to 26 (or have them randomly generated).
How much is the Mega Millions jackpot?
The current jackpot is estimated at $735 million. Winners can opt to take their winnings in the form of an annuity or as a single lump sum, known as the cash option. The cash option for the current jackpot is estimated at $356.7 million.
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By taking the annuity option, the winner would get the full jackpot advertised by Mega Millions, but it would be spread out in payments over 30 years.
No matter how lucky you are, you won’t get around paying taxes on a lottery jackpot. After mandatory federal income tax withholding, you’d get roughly $271.1 million, if you took the cash option. How much more you’d pay come tax time depends on whether you take where you bought the ticket — and where you live. To prepare, make sure you know the ins and outs of how the lottery works.
When is the next Mega Millions drawing?
The winning numbers will be drawn Tuesday, March 12 at 11 p.m. Eastern Time.
If there’s still no jackpot winner, the grand prize will continue to grow.
The odds of winning the jackpot are roughly 1 in 303 million.
How much is the next Powerball jackpot?
The current jackpot is estimated at $532 million.
Like Mega Millions, winners of Powerball can choose between an annuity that pays out over 30 years or a single lump sum. The cash option for the current jackpot is $260.1 million. After mandatory federal taxes, the holder of a single winning would keep about $197.7 million, minus any state taxes.
When is the next Powerball drawing?
The winning numbers will be drawn Monday, March 11 at 11 p.m. Eastern Time.
If there’s still no jackpot winner, the grand prize will continue to grow.
The odds of winning the jackpot are roughly 1 in 292 million.
The jackpot isn’t the only way to win. Both games have prizes for ticket holders whose chosen numbers match the drawing in a variety of combinations.
10 largest lottery jackpots
$2.04 billion (Powerball, Nov. 8, 2022 — one winning ticket).
$1.765 billion (Powerball, Oct. 11, 2023 — one ticket).
$1.586 billion (Powerball, Jan. 13, 2016 — three tickets).
$1.58 billion (Mega Millions, Aug. 8, 2023 — one ticket).
$1.537 billion (Mega Millions, Oct. 23, 2018 — one ticket).
$1.348 billion (Mega Millions, Jan. 13, 2023 — one ticket).
$1.337 billion (Mega Millions, July 29, 2022 — one ticket).
$1.08 billion (Powerball, July 19, 2023 — one ticket).
$1.05 billion (Mega Millions, Jan. 22, 2021 — one ticket).
$768.4 million (Powerball, March 27, 2019 — one ticket).
After I wrote a simple primer on Roth conversions a couple weeks ago, several readers reached out asking for more details. A few specific snippets of those questions include:
I see many articles like this about lowering your tax bracket when doing Roth conversions. But, what about the amount of money that can be made by not doing Roth conversions and letting the taxable [sic: qualified, or not taxable] money grow in an account like an IRA or 401K? Is that math too hard to explain?
Sure your RMDs will be higher and you will be taxed more, but how much more money will you make by letting that tax deferred money grow? You could assume a rate of return at 6% for the illustration.
Kelly M., Question 1
A wise man once said “never pay a tax before you have to.” Back around 2015 I had the owner of an income tax service try to convince me to convert all my traditional IRA money to Roth. He said tax rates were going to go up and he was converting all of his own personal traditional IRAs. Fast forward to 2017 and Congress actually ended up lowering tax rates. I wonder what he thought about his conversions after that.
Anonymous, Question 2
Even with my spouse still working, I don’t think we’ll hit the IRMAA limits while I do Roth conversions before I take Medicare. But, could Roth conversions now help me avoid the IRMAA thresholds when I’m taking RMDs in the future? Or, is it worth doing Roth conversions to avoid the IRMAA thresholds? I’d be interested in an article like that.
Anonymous, Question 3
To summarize those three questions:
Does the math of Roth conversions really work?
But since we don’t know future tax rates, how can we confidently convert assets today?
What about IRMAA (the income-related monthly adjustment amount), which is an additional Medicare surcharge on high-earners?
Let’s address these questions one at a time.
Does the Math of Roth Conversions Really Work?
Roth conversions involve many moving pieces, as you’ll see in this simple Roth conversion spreadsheet.
Reminder: you can make a copy of the spreadsheet via File >> Make a Copy
There are terrific financial planning software packages that take care of this math. I wanted to present 95% of the good stuff in a free format that you all can look at. Hence, Google Sheets.
Nuanced Tax Interactions
Especially important is the interaction between normal income (via Traditional account withdrawals), capital gains, and Social Security. These taxes interplay in nuanced ways. A simple example:
Let’s say a Single retiree’s annual income is:
$5000 in interest income
$5000 in long-term capital gains
$30,000 in Social Security benefits.
If you plug that into a 1040 tax return, you’ll find that:
None of that Social Security income is taxable.
All of the interest and capital gains are enveloped by the Standard deduction
Resulting in zero taxable income and a $0.00 Federal tax bill.
But if we copied Scenario A and added in $30,000 in Traditional IRA distributions, what happens? I think we all expect that the $30,000 distribution itself must have a taxable component, but you might not know that:
The IRA distribution affects Social Security taxability. Now, $22,350 of the Social Security income becomes taxable. That’s right. Simply by distributing IRA assets, you’ve now increased how much Social Security you pay taxes on.
The Standard deduction still helps, but there’s now a remainder of $48,500 in Federal taxable income.
Resulting in a $5584 Federal tax bill.
It’s not the end of the world. Taxes happen. They pay for our public shared interests.
But part of tax planning is understanding ahead of time what your future tax bills will look like. It’s important to understand how taxes interact. And this is just a simple example!
Measuring Roth Conversion Benefits
Going back to this spreadsheet, you’ll three tabs full of retirement withdrawal math. The Assumptions tab contains important information on our hypothetical retiree’s starting point (e.g. $2.9M in investable assets), their annual spending ($100K), their future assumed growth (5% per year, after adjusting for inflation), and other important numbers.
Note – this math takes place in “the convenient world” where inflation is removed from the math.
Then three tabs are presented with different Roth conversion scenarios, described below:
“Baseline Calculations“
This tab shows a retiree not focused on any conversions
They want to leave to their children both Roth assets (if possible) and taxable assets (on a stepped-up cost basis).
Therefore, they attempt to fund as much of their retirement using Traditional assets as possible
“No Trad Withdrawals”
This tab shows a “worst case” scenario, to help bookend the analysis. This retiree is not pulling any funds from their Traditional accounts (unless necessary). Thus, we’d expect them to have large RMDs and large RMD-related tax bills.
“Reasonable Conversions”
This tab shows a “reasonable” Roth conversion timeline, electing to convert $1.7 million throughout their retirement, while funding their lifestyle using a mix of Traditional, Roth, and taxable assets along the way.
By no means is this “optimized.” But it’s reasonable, and better than the first two scenarios, as we’ll see below.
Pros, Cons, and Results
The three scenarios end up similar in multiple ways.
Our retiree never has an issue funding their annual lifestyle. This is of utmost importance.
Our retiree reaches age 90 (“death”) with roughly $5M in each scenario.
But there are important differences (as we’d suspect).
The Baseline scenario ends with $5.00M. Of that, 27% is Traditional, 35% is Roth, and 34% is Taxable. They’ve paid an effective Federal tax rate of 20.7% throughout retirement.
The No Traditional Withdrawal scenario ends with $5.20M. Of that, 63% is Tradtional, 0% is Roth, 37% is Taxable. They’ve paid an effective Federal tax rate of 18.8% throughout retirement.
The Reasonable Conversions scenario ends with $5.17M. 18% is Traditional, 68% is Roth, and 14% is Taxable. They’ve paid an effective Federal tax rate of 13.9% throughout retirement.
The Same, But Different
These three scenarios share many similarities. All three result in successful retirements. But there are important differences.
Our Roth converter paid far fewer taxes and, ultimately, left a majority of their tax dollars to their heirs via Roth vehicles, and thus tax-free.
The No Trad Withdrawal retiree paid 28% effective tax rates in their final years (only going further up in the future) and left 63% of their assets in Traditional accounts with a large asterisk on them.***
***TAXES DUE IN THE FUTURE*** …unless you’re leaving the Traditional IRA assets to, for example, a non-profit charity. But if you’re leaving the Traditional IRA to your kids, they’ll owe taxes when they withdraw the funds.
Long story short: Roth conversions work to your benefit when executed intelligently.
Should You Worry About Leaving Behind Traditional Assets?!
I don’t want to freak you out. Your heirs will appreciate you leaving behind a 401(k) or Traditional IRA for them.
But it’s worth understanding that they’ll owe taxes on that money (usually). Let’s dive into an example with simple math: a $1 million Traditional IRA left to one person (e.g. your child).
That person will most likely set up an Inherited Traditional IRAand (via new-ish rules in the SECURE Act) will have to empty that account by the end of the 10th year after your death. The withdrawals can be raised and lowered during those 10 years. Much like with Roth conversions, it makes sense to take larger withdrawals during otherwise low-income years and vice versa.
But if the beneficiary is in the middle of their career, a series of 10 equal withdrawals makes sense. Some rough math suggests ~$135,000 per year is a reasonable withdrawal amount (based on account growth over the 10 years).
That withdrawal is taxed as income for the beneficiary. If they’re already earning $100,000 per year of normal income, then taxes will consume ~$41,000 of their annual $135,000 withdrawal. State taxes might take another bite.
Again – I don’t want anyone to cry over the prospect of inheriting $94,000 annually for 10 years. Where can I sign up?! But it’s also worth understanding that 30% of this inheritance is going to Federal taxes.
“Never Pay a Tax Before You Have To”
What about Question #2 from the beginning of the article? A reader wrote in and suggested one should “never pay a tax before you have to.”
While pithy, it’s false.
If you can reasonably front-load low tax rates to prevent later high tax rates, the math supports you. What we’ve covered so far today is clear evidence of that.
Now, in the reader’s defense: I’d rather delay taxes if thedollar amounts are exactly the same. That’s one argument behind the tax-loss harvesting craze: I’d rather pay $100 in taxes in the future than $100 in taxes today.
But Roth conversions work differently. Done well, Roth conversions allow you to pay a 22% tax on $50,000 today to prevent a 37% tax on $100,000 in the future. It’s apples-and-oranges compared to the tax-loss example.
And perhaps the bigger lesson: there are few universal rules in personal finance. The pithy rule that works in one scenario (“never pay a tax before you have to”) might fail miserably in another scenario. Let the math guide you.
What About IRMAA?
Irma used to only be a name you’d give to the great-grandmother character in your 11th-grade B-minus fiction story.
No longer! Today, IRMAA has been given new life (which, I bet, was covered by Medicare!)
IRMAA (Income-Related Monthly Adjustment Amount) is a Medicare premium surcharge imposed on higher-income beneficiaries in addition to their standard Medicare Part B and Part D premiums. The amount of IRMAA is determined based on an individual’s modified adjusted gross income (MAGI) and can result in higher healthcare costs for those with higher incomes.
In plain English: high-earners pay more for Medicare.
Question #3 today asked if Roth conversions can be used to avoid IRMAA premiums. The answer is: yes.
But first, how painful are these IRMAA surcharges in the first place?!
Important note: you’ll see below that the 2023 IRMAA brackets are based on 2021 modified adjusted gross income (MAGI). That same 2-year delay holds for future years. Your 2024 Roth conversions (or lack thereof) will be important in determining IRMAA in 2026
If a married couple’s MAGI in 2021 was $225,000, they’d end up paying $231 per month (or, more accurately, $462 per month for the couple) as opposed to $330 for the couple if they earned less than $194,000. That’s a difference of $132 per month or $1584 for the year.
I’m of two minds here. Because:
Yes, I believe in frugality. A penny saved is a penny earned. Why pay $1584 extra if you don’t have to?
But if you’re earning $200,000in retirement, do you also need to stress over a $1500 annual line item?
Personally, I’ll be stoked if my retirement MAGI is $200,000. It’ll be a sign that my financial life turned out unbelievably well. I won’t mind the IRMAA.
The people most likely to suffer IRMAA are also best positioned to deal with it.
Will IRMAA Get You?
The 2-year delay in IRMAA math means you might get IRMAA’d early on in retirement.
Imagine retiring at the end of 2023. The peak of your career! You and your spouse earned a combined $300,000 and now you’re settling down to mind your knitting. Like all U.S. citizens, you sign up for Medicare just before you turn 65.
Come 2025, Uncle Sam and Aunt IRMAA are going to look back at your 2023 income and surcharge you.
But the good news, most likely, is that your 2024 income is quite low in comparison and IRMAA will drop off in 2026.
Can Roth Conversions Help?
Remember: RMDs are forced and count as income, and that has the potential of “forcing” IRMAA on retirees as they age.
So to answer our terrific reader question: yes, Roth conversions can help here. You can use Roth conversions to shift the realization of income from high years to low years, preventing or mitigating IRMAA in the process.
But once more, make sure the juice is worth the squeeze.
If a 75-year-old has a $200,000 RMD that kills them on IRMAA, ask yourself: where does a $200,000 RMD come from? Answer: it’s coming from an IRA of over $5 million. Should someone with $5 million be losing sleep over IRMAA? I don’t think so.
That’s A Lot of Numbers…
A long and math-heavy article. I hope this helped you out! We covered:
Roth conversions can be objectively helpful, decreasing taxes in retirement and shifting large portions of portfolios from Traditional accounts (with potential taxes for heirs) into Roth accounts (no taxes for heirs)
Taxes in retirement are nuanced and interconnected. In today’s example, realizing extra income (via IRA distributions) also triggered extra Social Security taxes.
It’s not bad to leave behind Traditional assets to heirs. They’re getting a wonderful gift from you. But there will be taxes, which should be planned for.
There are many scenarios where it makes sense to pay taxes before you “have” to.
IRMAA is a negative reality for many retirees, but the people most likely to suffer IRMAA are also best positioned to deal with it.
Roth conversions can be used to mitigate IRMAA over the long run.
As always, thanks for reading!
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If you find yourself in a bad financial situation, making an early withdrawal from your 401(k) may sound tempting. But early withdrawals from your 401(k) come with hefty fines and can put your retirement at risk. So, before you do this, you should be sure that it’s truly a financial necessity.
That being said, there are situations when it makes sense, and occasionally, you can find ways to get the fees waived. This article will review everything you need to know before making an early 401(k) withdrawal.
Early 401(k) Withdrawal Options
Wondering if you can tap into your 401(k) funds ahead of schedule? The ability to make an early withdrawal from your 401(k) hinges on several factors, including your employer’s policies, the specifics of your plan, and your current employment status. Here’s a straightforward guide to understanding your options.
Checking With Your Employer
Your first step should be to get in touch with your human resources department. Not every employer permits early withdrawals from their 401(k) plans, and those that do may have specific criteria and procedures you’ll need to follow. The ease of starting this process and the options available to you will depend on various factors, such as your age and the specific rules of your plan.
For Former Employees
If you’re no longer employed with the company that holds your original 401(k), reaching out to the plan’s administrator is your next move. The administrator can provide you with the necessary steps and documentation required to initiate an early withdrawal. They’ll guide you through the process, ensuring you understand any implications or penalties associated with accessing your funds prematurely.
For Current Employees
Still working for the company where you’ve built your 401(k)? There might be restrictions on your ability to make early withdrawals. But don’t lose hope; you might have the option to borrow against your 401(k) instead.
Taking a 401(k) loan can be a viable alternative, offering a way to access your funds without the penalties associated with early withdrawals. We’ll delve into the specifics of 401(k) loans and how they work later on, providing you with all the information you need to make an informed decision.
401(k) Early Withdrawal Penalties
When it comes to pulling money from your 401(k) before reaching the age of 59 ½, the Internal Revenue Service (IRS) doesn’t give you a free pass. Let’s break down what this really means for your wallet. You’re not just facing a flat fee; it’s a combination of penalties and taxes that can significantly reduce the amount you end up with.
The 10% Penalty Explained
If you dip into your 401(k) early, the IRS imposes a 10% penalty on the amount you withdraw. This is their way of discouraging people from using their retirement savings prematurely. For example, if you withdraw $10,000, you owe $1,000 right off the bat to the IRS as a penalty.
Tackling the Tax Implications
But the financial impact doesn’t stop there. Since 401(k) contributions are made pre-tax, when you take money out, it’s considered taxable income. This means the amount you withdraw will be added to your total income for the year, potentially pushing you into a higher tax bracket.
To illustrate, let’s say you’re in the 22% tax bracket. On a $10,000 withdrawal, you’ll owe $2,200 in income taxes, in addition to the $1,000 penalty. So, from your $10,000, you’re down $3,200, leaving you with $6,800.
Real-World Example for Clarity
Imagine John, who decides to withdraw $10,000 from his 401(k) to cover an unexpected expense. John is in the 22% tax bracket. Here’s how his withdrawal breaks down:
10% early withdrawal penalty: $1,000
Income tax (22%): $2,200
Total deductions: $3,200
Amount John receives: $6,800
This example highlights the importance of considering the combined effect of penalties and taxes on early 401(k) withdrawals. It’s not just about the immediate need for cash but understanding the long-term impact on your retirement savings.
Tax Planning Strategies for Early 401(k) Withdrawals
Making an early withdrawal from your 401(k) can have significant tax implications. However, with careful planning, you can manage these impacts more effectively. Here are strategies to consider:
Spread Out Withdrawals
If possible, spreading out your withdrawals over several years can help manage your tax bracket. Large withdrawals can push you into a higher tax bracket, increasing your overall tax liability. By taking smaller amounts over time, you may stay within a lower tax bracket, reducing the amount of taxes owed.
State Tax Considerations
Remember that state taxes can also apply to 401(k) withdrawals. Tax rates and regulations vary by state, so it’s essential to understand the rules in your state and plan accordingly. Some states offer tax breaks or exemptions for retirement income, which could influence your withdrawal strategy.
Reinvesting Withdrawn Funds
If you must make an early withdrawal but don’t need the funds immediately for expenses, consider reinvesting them in a tax-advantaged account. This could be a Roth IRA, where withdrawals in retirement are tax-free, or a health savings account (HSA), if eligible. These moves can help mitigate the tax impact and potentially grow your investment tax-free.
Implementing these tax planning strategies can help you navigate the complexities of early 401(k) withdrawals, minimizing the tax bite and keeping your retirement goals on track. Consulting with a tax professional or financial advisor can provide personalized advice based on your individual situation and financial goals.
Hardship Withdrawal Eligibility and Requirements
When life throws you a financial curveball, tapping into your 401(k) through a hardship withdrawal might seem like a viable option. This choice allows you to access your retirement funds early without the standard 10% penalty, under specific conditions. Let’s explore what qualifies as a hardship withdrawal, the documentation you’ll need, and how to prove your need effectively.
Qualifying Conditions for Hardship Withdrawals
Hardship withdrawals are not given out for just any reason. The IRS defines specific scenarios where these withdrawals are permitted. These include:
Unreimbursed medical expenses: Significant out-of-pocket medical costs for you, your spouse, or dependents.
Home purchase: Down payment and closing costs for buying your primary residence.
Tuition and education fees: Tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for you, your spouse, children, or dependents.
Prevention of eviction or foreclosure: Amounts necessary to prevent eviction from or foreclosure on your primary residence.
Funeral expenses: Costs related to the death of a family member.
Repair of damage to primary residence: Costs for repairs to your home that would qualify for the casualty deduction under IRS rules.
Documentation Requirements
To successfully apply for a hardship withdrawal, you’ll need to provide substantial proof that your situation matches one of the qualifying conditions. This might include:
Unreimbursed medical expenses: Bills and statements from healthcare providers, showing the costs not covered by insurance.
Home purchase: Mortgage documents or contracts that highlight the purchase of a primary residence.
Tuition and education fees: Invoices from the educational institution for tuition, along with documentation for related expenses.
Prevention of eviction or foreclosure: Notice of eviction or foreclosure proceedings against your primary residence.
Funeral expenses: Funeral home invoices or other documentation of related expenses.
Repair of damage to primary residence: Estimates or receipts for repairs necessary due to damage that qualifies for a casualty deduction.
The Process of Proving Hardship
Proving hardship is more than just submitting documents. You’ll need to:
Contact your plan administrator: Start by reaching out to your plan’s administrator. They can guide you through the specific requirements and process for your plan.
Gather your documentation: Collect all relevant documents that substantiate your claim. This may require obtaining records from various sources, so it’s wise to start this step as soon as possible.
Complete the application: Fill out the necessary application forms provided by your plan. Ensure all information is accurate and attach your supporting documentation.
Await approval: After submitting your application, there will be a review process. During this time, your plan administrator may request additional information or clarification.
While a hardship withdrawal can offer a lifeline during financial distress, it’s crucial to approach this option with a full understanding of the qualifications and process. Remember, these withdrawals can impact your retirement savings, so consider all alternatives before proceeding.
Should you consider a 401(k) loan instead?
Considering a 401(k) loan instead of an early withdrawal might be a strategic move under certain circumstances. Below, we will clarify the nuances of 401(k) loans, including repayment conditions, interest rates, and when it’s advantageous to choose this option over withdrawing funds directly.
The Basics of 401(k) Loans
A 401(k) loan allows you to borrow against the savings in your retirement accounts without incurring the penalties and taxes associated with an early withdrawal. It’s a feature many plans offer, providing a way to access your funds for immediate needs while still keeping your retirement goals on track.
Repayment Terms
Repayment terms for 401(k) loans vary by plan, but typically, you’re expected to repay the loan within five years. Payments are usually set up on a monthly basis and are deducted directly from your paycheck, making the repayment process straightforward and manageable.
Interest Rates
The interest rate on a 401(k) loan is often comparable to or slightly higher than current market rates, but significantly lower than the rates associated with credit card debt or personal loans. The interest you pay goes back into your 401(k) account, essentially paying yourself back with interest, which can make this option particularly appealing.
When to Consider a 401(k) Loan
Choosing a 401(k) loan over a direct withdrawal or other financial avenues can be wise in several scenarios:
Avoiding penalties and taxes: If you need access to funds but want to avoid the penalties and taxes associated with an early 401(k) withdrawal.
Debt consolidation: When looking to consolidate high-interest debt under a lower interest rate, thus saving money in the long term.
Major expenses: For significant expenses, such as home repairs or medical bills, where using a 401(k) loan can provide a financially responsible solution.
Before opting for a 401(k) loan, consider the impact on your retirement savings. While you’re repaying the loan, the borrowed amount is not invested, potentially missing out on market gains. Additionally, if you leave your job, the loan may become due in full much sooner than the original five-year term.
Substantially Equal Periodic Payments (SEPP): A Closer Look
When considering accessing your 401(k) or IRA funds before the typical retirement age without facing penalties, the Substantially Equal Periodic Payments (SEPP) program can be a lifeline. This strategy requires a commitment to taking consistent withdrawals for a significant period. Let’s dive deeper into how SEPP works, how to calculate your payments, and when this approach might be particularly beneficial or risky.
How to Calculate SEPP Payments
Calculating your SEPP involves choosing from one of three IRS-approved methods: the Required Minimum Distribution (RMD) method, the Fixed Amortization method, and the Fixed Annuitization method. Each method uses your current account balance and life expectancy factors to determine annual withdrawal amounts, but they vary in flexibility and payment amounts.
RMD method: This method recalculates your payment each year based on the current account balance and your life expectancy.
Fixed amortization method: This calculates a fixed annual payment based on your life expectancy and account balance at the start of the SEPP plan.
Fixed annuitization method: This uses an annuity factor to determine annual payments, resulting in fixed payments for the duration of the SEPP period.
Scenarios Where SEPP Might Be Advantageous
SEPP plans can be particularly useful in several situations:
Early retirement: If you plan to retire early and need a steady income stream, SEPP allows you to access your retirement funds without the 10% early withdrawal penalty.
Bridge income gap: For those who need to bridge an income gap until other retirement benefits kick in, such as Social Security or pensions.
Financial emergencies: In cases where there are substantial financial needs before reaching 59 ½, SEPP provides a structured way to access funds.
Potential Pitfalls and Considerations
While SEPP offers a way to access retirement funds early, there are important considerations to keep in mind:
Commitment: Once you start SEPP, you must continue the withdrawals for at least five years or until you reach age 59 ½, whichever is longer. Deviating from the schedule can result in retroactive penalties.
Market risk: Your account is still subject to market fluctuations, which can impact your balance and, potentially, your withdrawal amounts if you’re using the RMD method.
Locking in losses: If you withdraw money during market downturns, it can lock in losses, potentially jeopardizing the longevity of your retirement funds.
SEPP can be a strategic tool for managing retirement funds before reaching the traditional retirement age. However, it’s crucial to carefully assess your financial situation, consider the long-term implications of starting SEPP, and consult with a financial advisor to ensure this strategy aligns with your overall retirement planning goals.
Alternatives to Early 401(k) Withdrawals
Accessing your 401(k) early can come with significant financial repercussions, including penalties and taxes that diminish your retirement savings. Fortunately, there are several other strategies you can consider to meet your financial needs without tapping into your retirement funds prematurely. Let’s delve into some of these alternatives and how they might serve as viable solutions.
Borrow from Family or Friends
One of the most straightforward alternatives is to seek a loan from family or friends. This option can offer more flexible repayment terms and potentially lower (or no) interest rates. However, it’s essential to approach this solution with clear communication and, ideally, a formal agreement to avoid any misunderstandings or strain on your relationships.
Sell Personal Assets
Another strategy is to evaluate your personal assets for items that you can sell. This could range from high-value items like a second car or recreational vehicles to smaller, valuable assets such as electronics or collectibles. Selling assets can provide a quick influx of cash without the need to worry about interest rates or penalties.
Explore Government and Non-Profit Assistance
For those facing financial hardship, various government and non-profit programs offer financial assistance. These programs can provide support for a range of needs, including housing, utilities, food, and medical expenses. Researching and applying to these programs can offer a way to bridge your financial gap without compromising your retirement savings.
Consider Home Equity Loans and HELOCs
If you have equity in your home, tapping into it through a home equity loan or a home equity line of credit (HELOC) might be a strategic alternative to early 401(k) withdrawals. Both options can offer more favorable interest rates than a personal loan or credit cards, but with distinct differences in how you access and repay the funds.
Home Equity Loans
Home equity loans provide a lump sum at a fixed interest rate, making it an excellent choice for one-time, significant expenses. The predictable repayment schedule helps with budgeting but requires you to take out a precise amount from the start.
HELOCs
HELOCs, in contrast, offer a flexible credit line, similar to a credit card, but with lower interest rates. This option allows you to borrow as needed over a draw period, usually with variable interest rates. The flexibility is ideal for ongoing expenses, but it’s vital to manage this responsibly due to the fluctuating payments.
Personal Loans and Credit Options
Personal loans from banks or credit unions, as well as low-interest or 0% APR credit card offers, can also provide temporary relief. These options may come with higher interest rates than a HELOC but don’t require collateral. When choosing this route, it’s vital to compare offers and understand the terms to ensure they align with your financial recovery plan.
Conclusion
When faced with financial needs, deciding whether to access your 401(k) early is a significant choice. It’s crucial to weigh the immediate benefits against the long-term impact on your retirement savings. As we’ve explored, alternatives like borrowing from family or friends, selling personal assets, or tapping into home equity through loans or HELOCs can provide the necessary funds without the drawbacks of early withdrawal penalties and taxes.
For those considering a 401(k) loan or Substantially Equal Periodic Payments (SEPP), these options offer ways to access your funds while minimizing the negative effects on your retirement account. However, each choice comes with its own set of considerations and potential impacts on your financial future.
Ultimately, the decision should align with your overall financial strategy and long-term goals. Consulting with a financial advisor can provide personalized advice, helping you to make an informed choice that balances your immediate needs with your retirement aspirations. Remember, the goal is to ensure financial stability now without compromising your future well-being.
Inside: Embark on a profitable journey with our guide on starting a bookkeeping business. Find the steps on how to become a bookkeeper and find success.
Starting a bookkeeping business from scratch can be an exciting yet nerve-wracking venture.
For many budding entrepreneurs, the formidable task of setting up a business adds a mix of anxiety and anticipation. The initial trepidation often stems from dealing with the unknowns of a new venture and the pressure of ensuring meticulous financial management of someone else’s finances.
However, with thorough planning and an understanding of the essential steps, such as crafting a solid business plan and obtaining the necessary certifications, these nerves can be managed.
By embracing your entrepreneurial spirit and equipping yourself with the right knowledge, you can lay a strong foundation for a successful bookkeeping business.
Plus it is easier to get started than you thought…
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
What is a bookkeeping business?
At its core, a bookkeeping business manages the financial records of other businesses. They ensure accuracy, track receipts and expenses, and prepare financial statements – the financial bedrock upon which enterprises stand.
With an emphasis on accuracy and organization, they are responsible for keeping the financial data up to date and available for strategic decisions.
For many, this is a popular way to make money online.
Earn Extra Income with Bookkeeping
Bookkeeping is the most stable, reliable & simple business to own. This is how to make a realistic income -either part-time or full-time.
Find out TODAY if this is THE business you’ve been looking for.
Show Me How
First Steps to Starting a Bookkeeping Business
Craft a Comprehensive Business Plan for Success
Your roadmap to success begins with a business plan. This document is crucial—it outlines your vision, goals, unique value proposition, target market, competitive landscape, marketing strategies, and detailed financial forecasts. Think of it as your strategic compass guiding you from startup to growth.
This takes your side hustle to an actual living thriving business.
Remember, your business plan is a living document. You must regularly review and update your business plan will help you stay on track toward your business objectives and adjust course as necessary to meet new challenges or opportunities.
Acquire Essential Certifications and Training
By obtaining the right certifications and training, you not only perfect your craft but also send a message of reliability and professionalism to prospective clients. While this may require an investment of time and resources, the credibility and expertise you gain are invaluable assets for your bookkeeping business.
Select bookkeeping courses that cover crucial topics such as accounting principles, financial statements, tax preparation, and accounting software. This education will deepen your understanding and sharpen your skills.
Stay updated with continuing professional education (CPE) credits to keep your certifications active and your knowledge fresh.
Familiarize yourself with popular bookkeeping software that you’ll use day-to-day. Being proficient in these tools will increase your efficiency and accuracy—qualities clients highly value.
Once certified, don’t forget to prominently display your credentials on your website and marketing materials. This can significantly bolster potential clients’ trust in your abilities and help establish your reputation as a qualified bookkeeping professional.
Bookkeepers.com Online Courses
Learn what you need to start your very own virtual bookkeeping business.
An overview of the bookkeeping business so you can see if it is right for you.
The tools you need to “wow” clients and get paid for your services and
How to create a steady stream of new clients without the need to “sell” yourself.
Learn More
Legal Considerations and Compliance
Setting the legal foundation for your bookkeeping business is not just a formality—it’s about protecting your operations and establishing credibility.
Register Your Business and Secure the Necessary Permits
Let’s look at the essential steps to ensure your business is registered correctly and fully compliant with regulatory requirements.
Choose a Business Structure: Decide whether an LLC, sole proprietorship, partnership, or corporation best suits your needs.
Register Your Business Name: This is a crucial branding element. Check for name availability and register it with the appropriate state agency, ensuring it’s unique and resonates with your target market.
Obtain an EIN: If you’re in the U.S., you’ll need an Employer Identification Number (EIN) for tax purposes, especially if you plan to hire employees. This number is also often required to open a business bank account and apply for business licenses.
Apply for Licenses and Permits: Depending on your location and the structure of your business, you may need various licenses and permits. Check local and state regulations to ensure you meet all legal requirements.
Register for State Taxes: If applicable, register for your state’s tax structure. This may include sales tax, unemployment insurance tax, and other business-related taxes.
Comply with Local Regulations: Ensure you’re familiar with local zoning laws if operating from home, and obtain a Certificate of Occupancy if required. If you’re part of a homeowners’ association, review any stipulations they might have on home-based businesses.
Understand Ongoing Compliance: Be aware of annual filings, renewals for licenses and permits, and other regulatory commitments to maintain compliance.
By being diligent with these legal prerequisites, you’re not just following the rules—you’re also sending a clear message about your professionalism and attention to detail.
Protect Your Endeavors with the Right Insurance
Insurance is the safety net that can save your bookkeeping business from unexpected financial challenges. It’s not about expecting the worst; it’s about being prepared for any situation that could undermine the stability and reputation of your business.
General Liability Insurance: This covers a broad range of issues, including bodily injury or property damage claims made by others.
Cyber Liability Insurance: As a bookkeeper dealing with sensitive data, you’ll want protection against cyber threats and data breaches.
Property Insurance: If you have a physical office or own valuable equipment, property insurance can cover losses from events like fire or theft.
By integrating the right insurance policies into your business strategy, you set up a protective fortress around the hard work and dedication you put into your bookkeeping business. Insurance should not be perceived as an unnecessary expense but rather as a prudent investment in your business’s longevity and reputation.
Setting Up Shop
Establishing a Home Office vs. Renting Space
Choosing the right environment for your bookkeeping business is a balancing act between professionalism, cost-effectiveness, and personal working style. Whether you decide on a home office or opt for a rented space, the decision will significantly impact your operations.
Home Office Advantages
Renting Space Advantages
Cost Savings: Eliminate commuting costs and monthly rent, channeling those savings back into your business.
Professionalism: A commercial office can provide a more professional setting for client meetings and create a clear boundary between work and home life.
Convenience: Enjoy the flexibility of setting your own hours and working in a stress-free environment.
Networking Opportunities: Proximity to other businesses in shared office spaces can foster relationships and potential client referrals.
Tax Deductions: You may be eligible for home office tax deductions, saving you money during tax season.
Amenities: Rented spaces often come with value-added services like receptionists or conference rooms.
Home Office Disadvantages
Renting Space Disadvantages
Distractions: Domestic life can disrupt your work, impacting productivity.
Overhead Costs: Monthly rent and utility bills will add to your business expenses.
Professional Image: Having a dedicated business address and separate workspace can often project a more professional image to clients.
Long-term Commitments: Leases typically require a long-term commitment that may be risky if your business circumstances change.
Ultimately, the decision depends on the nature of your clientele, your personal work preferences, and your budget. Also, this is great for a stay at home mom to make money.
Many bookkeepers find success starting with a home office and transitioning to rented space as the business expands. Others may find that a small rented office fits their needs right from the onset, or that a virtual office setup provides the perfect middle ground.
Selecting State-of-the-Art Bookkeeping Software
With the right bookkeeping software, you can streamline your operations, foster transparency with clients, and confidently tackle complex financial scenarios.
Adopting top-notch software will serve as both a foundation and a catalyst for your bookkeeping business, ensuring you remain competitive and responsive in a rapidly evolving industry.
Look into popular bookkeeping software such as QuickBooks Online, Xero, FreshBooks, and MYOB. Compare them based on features, ease of use, scalability, and customer support.
By taking the time to carefully weigh these factors, you will be better positioned to select bookkeeping software that not only meets your current needs but also supports your business as it expands.
Financial Foundations for Your Firm
Unravel Funding Options and Small Business Loans
Before seeking funding, calculate your startup costs including equipment, software subscriptions, legal fees, marketing, and initial operating expenses. This will help you understand how much capital you need to secure.
Typically, you should be able to start your bookkeeping business with little investment and add additional expenses as you grow.
If needed, there are a variety of funding sources available for new businesses. Research options like traditional bank loans, credit unions, Small Business Administration (SBA) loans, online lenders, and crowdfunding. When applying for loans or pitching to investors, a comprehensive business plan is essential. It should outline your business concept, financial projections, and growth strategy to demonstrate the viability and potential profitability of your bookkeeping business.
Smart Money Management from the Start
Establishing smart money management practices from the very inception is the same as being financially sound with your personal finances.
Open a Dedicated Business Bank Account: Keep your personal and business finances separate. This is fundamental for accurate bookkeeping and simplifies your tax situation come year-end.
Start With a Budget: Even before your first client, create a realistic budget for your business. Know the costs of all aspects, including marketing, equipment, insurance, and any other operational expenses. This will help prevent overspending and ensure your resources are allocated effectively.
Use the Profit First Formula: This simple formula will help you to pay yourself as well as have enough money for operational expenses and to pay your self-employment taxes.
By establishing and maintaining these smart money management practices from the outset, you’re not just safeguarding your bookkeeping business against common financial pitfalls—you’re also building a foundation for a prosperous financial future.
Marketing Your Bookkeeper Business
Digital Presence: Creating a Website That Converts
In today’s digital-first world, your website often makes the first impression for your bookkeeping business. It’s not just an online brochure; it’s a crucial tool engineered to turn visitors into leads and leads into loyal clients.
User-Friendly Design: Your website should be easy to navigate with a clean layout that directs visitors naturally from one section to the next. Prioritize quick load times and mobile responsiveness with Kadence to cater to all potential clients.
Clear Value Proposition: Immediately communicate what you offer and why a potential client should choose your bookkeeping services. Highlight your unique selling points front and center on the homepage.
Strong Call-to-Actions (CTAs): Use compelling CTAs to guide visitors towards taking action, whether that’s contacting you, scheduling a consultation, or signing up for your newsletter. Make it easy for them to engage with you.
Client Testimonials and Case Studies: Social proof can be incredibly persuasive. Showcase positive reviews, client testimonials, and case studies to build trust and credibility with prospective clients.
With a well-crafted website, your bookkeeping business demonstrates its expertise and readiness to cater to client needs, no matter where they are in their financial journey.
Networking and Navigating Social Media Strategies
Building a robust network and mastering social media can turbocharge your bookkeeping business’s growth. It positions you not just as a service provider, but as a thought leader in your field.
Identify the Right Platforms: Choose one or two social media platforms where your target audience is most active. LinkedIn, for instance, is a goldmine for professional networking, while Instagram can showcase your brand’s personality.
Create Valuable Content: Share content that resonates with your audience — tips to manage business finances, tax updates, or insights into bookkeeping trends. This positions you as an expert and invites engagement.
Engage Actively: Don’t just post and disappear; interact with your followers. Answer questions, join discussions, and show appreciation for their engagement. Building relationships is key to networking success.
Leverage Professional Groups and Forums: Beyond your own social channels, be active in online groups or forums related to bookkeeping and your clients’ industries to expand your visibility and establish credibility.
Your network and social media are not just channels for promoting your services; they’re platforms for sharing your expertise, engaging with peers and potential clients, and building a community around your bookkeeping brand.
Bookkeeping Startup Pricing, Clients, and Growth
Determining Competitive Rates for Your Services
Setting competitive, yet fair pricing for your bookkeeping services is a balancing act that ensures value for your clients and viability for your business.
Let’s explore how to establish a rate structure that meets the market demands and supports your financial goals.
Market Research: Begin by understanding what other bookkeepers in your area or within your niche are charging. This insight will help you benchmark your rates competitively. Keep in mind factors like experience, specialization, and location.
Value Your Expertise: Assess your qualifications, experience, and the quality of services you offer. Clients are willing to pay for the value you bring to their business, so price your services accordingly.
Consider Your Costs: Ensure your rates cover your expenses, including software subscriptions, continuing education, insurance, and taxes, while also leaving room for profit.
Pricing Models: Decide whether you’ll charge hourly, offer flat-fee packages, or adopt a value-based pricing model. Each model has its advantages and can be chosen based on the type of service or client preferences.
Communicate Your Pricing Clearly: Be transparent with clients about your rates. Clear communication prevents misunderstandings and builds trust from the outset. [Placeholder for sample pricing page]
Within your pricing strategy, consider the lifetime value of client relationships and the potential for added services down the line.
How will you find clients for your bookkeeping business?
Finding clients is the engine that powers your bookkeeping business and your income. With a strategic combination of diligent networking, tactical marketing, and leveraging existing relationships, you can start building your client base.
Utilize Online Platforms: Websites like Upwork, Fiverr, and LinkedIn can connect you with businesses looking for bookkeeping services.
Local Business Outreach: Approach local businesses directly. Offer to discuss how your bookkeeping services can alleviate their financial stress and add value to their operations.
Referral Program: Encourage word-of-mouth by setting up a referral program. Incentivize your current clients or network to refer others to you.
Social Media and Content Marketing: Create and share engaging content on your social media profiles to build brand awareness.
Community Involvement: Join local business associations, attend chamber of commerce events, or contribute to community projects. These can lead to connections and opportunities.
Offer Free Workshops or Webinars: By providing value upfront through informative sessions on bookkeeping and financial management, you can attract potential clients who are interested in improving their business finances. Also, you can partner with other professionals.
Professional Partnerships: Build relationships with accountants, lawyers, and business consultants who might not offer bookkeeping services but can refer their clients to you.
With a consistent and strategic approach, you can attract and retain the clients that are the best fit for your business, ultimately building a robust client portfolio. Remember, it’s not just about finding any clients—it’s about finding the right clients who treasure you.
Discovering and Retaining Your Ideal Clientele
Attracting clients is one feat, but discovering and retaining those who are the perfect fit for your bookkeeping business is where the real growth happens.
Offer Customized Solutions: Set yourself apart by tailoring your services to meet the specific needs of your clients. Show that you understand their industry and are invested in their success.
Provide Exceptional Service: Consistently deliver high-quality work, be responsive, and proactively address your clients’ needs. Clients will stay with a bookkeeper who goes above and beyond.
Host Client Appreciation Events: Small gestures of appreciation or exclusive events can strengthen business relationships and foster client loyalty.
Stay on Top of Industry Trends: Being knowledgeable about your clients’ industries can make you indispensable. Offer insights that can help them stay ahead of the curve.
Stay Ahead in the Bookkeeping Scene
Continuous Learning and Leveraging Industry Trends
The bookkeeping industry doesn’t stand still, and neither should you. Continuous learning keeps you at the forefront of evolving practices, ensuring your services remain relevant and your advice sound.
Keep Abreast of Regulatory Changes: Tax laws, financial regulations, and compliance standards can affect your clients; stay updated through webinars, online courses, and industry news.
Embrace Technological Innovations: New software and tools can streamline bookkeeping tasks. Be open to adopting tech that can improve your efficiency and the services you provide.
Participate in Professional Development: Attend workshops, seminars, and conferences geared toward bookkeeping professionals. Networking with peers can also uncover new trends and techniques.
By maintaining a commitment to continuous learning, you not only improve your own skillset but also enhance the overall value of your bookkeeping services.
Join Professional Associations for Peer Support
Being part of a professional association offers more than just credentials; it’s a direct line to a community of peers who can share insights, resources, and support as you build and grow your bookkeeping business.
By joining professional associations such as the American Institute of Professional Bookkeepers (AIPB) or the National Association of Certified Public Bookkeepers (NACPB), you demonstrate a commitment to professionalism and continuous improvement. These affiliations provide a wealth of resources to support you in delivering high-quality services and growing a thriving bookkeeping business.
Plus you can take advantage of seminars, webinars, and certification courses offered by associations to further your education and maintain any required continuing education credits.
Bookkeepers.com Online Courses
Learn what you need to start your very own virtual bookkeeping business.
An overview of the bookkeeping business so you can see if it is right for you.
The tools you need to “wow” clients and get paid for your services and
How to create a steady stream of new clients without the need to “sell” yourself.
Frequently Asked Questions (FAQs)
Yes, a bookkeeping business can certainly be profitable. It offers a low overhead cost model, recurring revenue opportunities through ongoing client relationships, and the potential to scale services.
With diligent financial management and strategic growth, profitability can be substantial.
While a degree is beneficial for deep knowledge, it’s not mandatory. Certification and practical experience can often suffice in starting a successful bookkeeping business.
In fact, this is one of the best low stress jobs without a degree.
Begin by gaining an understanding of bookkeeping principles, getting certified, investing in software, and slowly building up your clientele with strategic marketing and networking.
Ready to Open Bookkeeping Business?
Starting your own bookkeeping business can be a fruitful endeavor with the right preparation and education.
This guide outlines the key steps and provides direction on how to start a bookkeeping business, ensuring you cover all essential elements for a successful launch. With focus and attention to these structured steps, you’ll be well on your way to establishing a thriving bookkeeping business.
Still on the fence? Check out this free bookkeeping webinar to learn more.
With the right preparation, tools, and mindset, you can launch a thriving venture that supports businesses in their financial journey while growing your own entrepreneurial dreams.
Embrace the adventure—your future in finance awaits!
Just remember if you are looking for ways to make money fast, this one comes with patience and perseverance to make things happen.
Earn Extra Income with Bookkeeping
Bookkeeping is the most stable, reliable & simple business to own. This is how to make a realistic income -either part-time or full-time.
Find out TODAY if this is THE business you’ve been looking for.
Know someone else that needs this, too? Then, please share!!
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More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
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Inside: Learn what 11 an hour is how much a year, month, and day. Plus tips to budget your money. Don’t miss the ways to increase your income.
We are going to under the cover and discover $11 an hour is how much per year.
For most Americans, this is hovering near minimum wage.
Let’s get this straight… This is not a livable wage.
If you are in high school or college and have support from your parents, then this is great spending money for you.
However, if you are making it on your own, $11 per hour will not make ends meet each month.
For most people, being at minimum wage is common and the goal is to make your way up the payscale and quickly!
In this post, we’re going to detail exactly what $11 an hour is how much a year. Also, we are going to break it down to know how much is made per month, bi-weekly, per week, and daily.
That will help you immensely with how you spend your money. Because too many times the hard-earned cash is brought home, but there is no actual plan for how to spend that money.
When living close to minimum wage, you must know how to manage money wisely.
More than likely, you are living paycheck to paycheck and struggling to survive to the next paycheck. Take a deep breath and make this minimum wage just a season.
The ultimate goal is to make the most of your hourly wage with inspirations to make more money.
If that is something you want to do, then keep reading. You are in the right place.
$11 an Hour is How Much a Year?
When we ran all of our numbers to figure out how much is $11 per hour is as annual salary, we used the average working day of 40 hours a week.
40 hours x 52 weeks x $11 = $22,880
$22,880 is the gross annual salary with a $11 per hour wage.
As of June 2023, the average hourly wage is $33.58 (source).
This you are making WAY LESS than the average wage.
Let’s breakdown how that number is calculated
Typically, the average work week is 40 hours and you can work 52 weeks a year. Take 40 hours times 52 weeks and that equals 2,080 working hours. Then, multiply the hourly salary of $11 times 2,080 working hours and the result is $22,880.
That number is the gross income before taxes, insurance, 401K, or anything else is taken out. Net income is how much you deposit into your bank account.
Work Part Time?
But you may think, oh wait, I’m only working part time. So if you’re working part time, the assumption is working 20 hours a week at $11 an hour.
Only 20 hours per week. Then, take 20 hours times 52 weeks and that equals 1,040 working hours. Then, multiply the hourly salary of $11 times 1,040 working hours and the result is $11,440.
How Much is $11 Per Month?
On average, the monthly amount would average $1,907.
Annual Amount of $22,880 ÷ 12 months = $1,907 per month
Since some months have more days and fewer days like February, you can expect months with more days to have a bigger paycheck. Also, this can be heavily influenced by how often you are paid on and on which days you get paid.
Work Part Time?
Only 20 hours per week. Then, the monthly amount would average $953.
How Much is $11 per Hour Per Week
This is a great number to know! How much do I make each week? When I roll out of bed and do my job, what can I expect to make at the end of the week?
Once again, the assumption is 40 hours worked.
40 hours x $11 = $440 per week.
Work Part Time?
Only 20 hours per week. Then, the weekly amount would be $220.
How Much is $11 per Hour Bi-Weekly
For this calculation, take the average weekly pay of $440 and double it.
$440 per week x 2 = $880
Also, the other way to calculate this is:
40 hours x 2 weeks x $11 an hour = $880
Work Part Time?
Only 20 hours per week. Then, the bi-weekly amount would be $440.
How Much is $11 Per Hour Per Day
This depends on how many hours you work in a day. For this example, we are going to use an eight hour work day.
8 hours x $11 per hour = $88 per day.
If you work 10 hours a day for four days, then you would make $110 per day. (10 hours x $11 per hour)
Work Part Time?
Only 4 hours per day. Then, the daily amount would be $44.
$11 Per Hour is…
$11 per Hour – Full Time
Total Income
Yearly (52 weeks)
$22,880
Yearly (50 weeks)
$22,000
Monthly (173 hours)
$1,907
Weekly (40 Hours)
$440
Bi-Weekly (80 Hours)
$880
Daily Wage (8 Hours)
$88
Net Estimated Monthly Income
$1,455
**These are assumptions based on simple scenarios.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Paid Time Off Earning 11 Dollars an Hour
Does your employer offer paid time off?
As an hourly, close to minimum wage employee, more than likely you will not get paid time off.
So, here are the scenarios for both cases.
For general purposes, we are going to assume you work 40 hours per week over the course of the year.
Case # 1 – With Paid Time Off
Most hourly employees get two weeks of paid time off, equivalent to 2 weeks of paid time off.
In this case, you would make $22,800 per year.
This is the same as the example above for annual salary making $11 per hour.
Case #2 – No Paid Time Off
Unfortunately, not all employers offer paid time off to their hourly employees. While that is unfortunate, it is best to plan for less income.
Life happens. There will be times you need to take time off for numerous reasons – sick time, handling an emergency, or even vacation.
So, let’s assume you take 2 weeks off without paid time off.
That means you would only work 50 weeks of the year instead of all 52 weeks. Take 40 hours times 50 weeks and that equals 2,000 working hours. Then, multiply the hourly salary of $11 times 2,000 working hours, and the result is $22,000.
40 hours x 50 weeks x $11 = $22,000
You would average $88 per working day and nothing when you don’t work.
$11 an Hour is How Much a year After Taxes
Let’s be honest… Taxes can take up a big chunk of your paycheck. Thus, you need to know how taxes can affect your hourly wage.
This is why you always wondering why your take-home pay is so much less.
Also, every single person’s tax situation is different.
On the basic level, let’s assume a 12% federal tax rate and a 4% state rate. Plus a percentage is taken out for Social Security and Medicare (FICA) of 7.65%.
Gross Annual Salary: $22,880
Federal Taxes of 12%: $2,746
State Taxes of 4%: $915
Social Security and Medicare of 7.65%: $1,750
$11 an Hour per Year after Taxes: $17,469
This would be your net annual salary after taxes.
To turn that back into an hourly wage, the assumption is working 2,080 hours.
$17469 ÷ 2080 hours = $8.40 per hour
After estimated taxes and FICA, you are netting $8.40 an hour. That is $2.60 an hour less than what you planned.
This is a very highlighted example and can vary greatly depending on your personal situation. Therefore, here is a great tool to help you figure out how much your net paycheck would be.
$11 an Hour Budget – Example
You are probably wondering can I live on my own making 11 dollars an hour? How much rent can you afford at 11 an hour?
Using our Cents Plan Formula, this is the best case scenario on how to budget your $11 per hour paycheck.
When using these percentages, it is best to use net income because taxes must be paid.
In this example, we calculated $11 an hour was $8.40 after taxes. That would average $1455 per month.
According to the Cents Plan Formula, here is the high level view of a $11 per hour budget:
Basic Expenses of 50% = $728
Save Money of 20% = $291
Give Money of 10% = $146
Fun Spending of 20% = $291
Debt of 0% = $0
Obviously, that is not doable when living so close to minimum wage. So, you have to be strategic on ways to decrease your basic expenses and debt. Then, it will allow you more money to save and fun spending.
To further break down an example budget of $11 per hour, then using the ideal household percentages is extremely helpful.
recommended budget percentages based on $11 per hour wage:
Category
Ideal Percentages
Sample Monthly Budget
Giving
10%
$76
Savings
15-25%
$114
Housing
20-30%
$572
Utilities
4-7%
$114
Groceries
5-12%
$153
Clothing
1-4%
$19
Transportation
4-10%
$114
Medical
5-12%
$191
Life Insurance
1%
$16
Education
1-4%
$10
Personal
2-7%
$29
Recreation / Entertainment
3-8%
$48
Debts
0% – Goal
$0
Government Tax (including Income Taxes, Social Security & Medicare)
15-25%
$451
Total Gross Income
$1,907
**In this budget, prioritization was given to basic expenses. Thus, some categories like giving and saving were less.
Living on $11 Per Hour
Living close to minimum wage can be a very difficult situation.
Is it doable? Probably not for long.
You just have to be wiser (or frugal) with your money and how you spend the hard-earned cash you have been blessed with.
A lot of times when people are making under the minimum wage mark, they feel like they are in this constant cycle that they can never keep up (which completely makes sense it is hard!).
When your thoughts are constantly focused on how you are struggling to keep up with bills and expenses, that is all you focus on.
You need to do is change your money mindset.
This is what you say to yourself… Okay, I am making near minimum wage for now. I have aspirations and goals to increase how much I make. For now, I am going to make sure that I am able to live on my 11 dollars per hour. I’m going to try and avoid debt and payday loans at all costs.
Other Tips to Help You:
Check your minimum wage for your state and city. You might find a higher minimum wage in a nearby city.
Look to living in a lower cost of living area to stretch your money.
Find ways to minimize your basic expenses.
Thrive with a minimalist lifestyle.
Decide if a roommate or moving back with your parents would help.
Bike or walk to work.
In the next section, we will dig into ways to increase your income, but for now, you must focus on living on $11 an hour.
5 Ways to Increase Your Hourly Wage
This right here is the most important section of this post.
You need to figure out ways to increase your hourly income because I’m going to tell you…you deserve more. You do a good job and your value is higher than what your employers pay you.
Even an increase of 50 cents to $11.50 will add up over the year. Even better $12 an hour!
1. Ask for a Raise
The first thing to do is ask for a raise. Walk right in and ask for a raise because you never know what the answer will be until you ask.
If you want the best tips on how specifically to ask for a raise and what the average wage is for somebody doing your job, then check out this book. In this book, the author gives you the exact way to increase your income. The purchase is worth it or go down to the library and check that book out.
2. Look for A New Job
Another way to increase your hourly wage is to look for a new job. Maybe a completely new industry.
It might be a total change for you, but many times, if you want to change your financial situation, then that starts with a career change. Maybe you’re stressed out at work. Making $11 an hour is too much for you and you’re not able to enjoy life, maybe changing jobs and finding another job may increase your pay, but it will also increase your quality of life.
3. Find a New Career
Because of student loans, too many employees feel like they are stuck in the career field they chose. They feel sucked into the job that they don’t like or have the potential they thought it would.
For many years, I was in the same situation until I decided to do a complete career change. I am glad I did. I have the flexibility that I needed in my life to do what I wanted when I needed to do it. Plus I am able to enjoy my entrepreneurial spirit.
4. Find Alternative Ways to Make Money
In today’s society, you need to find ways to make more money. Period.
There is no way to get around it. You need to find additional income outside a traditional nine-to-five position or typical 40 hour a week job. You will reach a point where you are maxed on what you can make in your current position or title. There may be some advancement to move forward, but in many cases, there just is not much room for growth.
So, you need to find a side hustle – another way to make money.
Do something that you enjoy, turn your hobby into a way to make money, turn something that you naturally do, and help others into a service business. In today’s society, the sky is the limit on how you can earn a freelancing income.
5. Earn Passive Income
The last way to increase your hourly wage is to start earning passive income.
This can be from a variety of ways including the stock market, real estate, online courses, book sales, etc. This is where the differentiation between struggling financially and being financially sound happens.
By earning money passively, you are able to do the things that you enjoy doing and not be loaded down, with having a job that you need to work, and a place that you have to go to. And you still make money doing nothing.
Here is an example:
You can start a brokerage account and start trading stocks for $50. You need to learn and take the one and only investing class I recommend. Learn how the market works, watch videos, and practice in a simulator before you start using your own money.
One gentleman started with $5,000 in his trading account and now has well over $36,000 in a year. Just from practice and being consistent, he has learned that passive income is the way for him to increase his income and also not be a slave to his job.
Tips to Live on $11 an Hour
In this last section, grasp these tips on how to live on $11 an hour. On our site, you can find lots of money saving tips to help stretch your income further.
Here are the most important tips to live on $11 an hour. Highlight these!
1. Spend Less Than You Make
First, you must learn to spend less than you make.
If not you will be caught in the debt cycle and that is not where you want to be. You will be consistently living paycheck to paycheck.
In order to break that dreadful cycle, it means your expenses must be less than your income.
And when I say income, it’s not the $11 an hour. As we talked about earlier in the post, there are taxes. The amount of taxes taken out of your paycheck is called your net income which is $11 an hour minus all the taxes, FICA, Social Security, and Medicare is taken out. That is your net income.
So, your net income has to be less than your net income.
2. Living Below Your Means
You need to be happy. And living on less can actually make you happier. Studies prove that less is better.
Finding contentment in life is one thing that is a struggle for most.
We are driven to want the new shiny toy, the thing next door, the stuff your friend or family member got. Our society has trained you that you need these things as well.
Have you ever taken a step back and looked at what you really need?
Once you are able to find contentment with life, then you are going to be set for the long term with your finances.
Here is our story on owning less stuff. We have been happier since.
3. Make Saving Money Fun
You need to make saving money fun. Period.
It could be participating in a no spend challenge for the month.
Check out the 200 envelope challenge (which is doable on your income)
It could be challenging your friends not to go to Target for a week.
Maybe changing your habits and not picking up takeout and planning meals.
Whatever it is challenge yourself.
Find new ways of saving money and have fun with it.
Even better, get your family and kids involved in the challenge to save money. Tell them the reason why you are saving money and this is what you are doing.
Here are 101 things to do with no money. Free activities without costing you a dime. That is an amazing resource for you and you will never be bored.
And you will learn a lot of things in life you can do for free. Personally, some of the best ones are getting outside and enjoying some fresh air.
4. Make More Money
If you want if you do not settle for less, then find ways to make more money. If you want more out of life, then increase your income.
You need to be an advocate for yourself.
Find ways to make more money.
It could be a side hustle, a second job, asking for a raise, going to school to change careers, or picking up extra hours.
Whatever path you take, that’s fine. Just find ways to make more money. Period.
5. No State Taxes
Paying taxes is one option to increase what you take home in each paycheck.
These are the states that don’t pay state income taxes on wages:
Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Washington
Wyoming
It is very interesting if you take into account the amount of state taxes paid compared to a state with income taxes.
Also, if you live in one of the higher taxed states, then you may want to reconsider moving to a lower cost of living area. The higher taxes income tax states include California, Hawaii, New Jersey, Oregon, Minnesota, the District of Columbia, New York, Vermont, Iowa, and Wisconsin. These states tax income somewhere between 7.65% – 13.3%.
6. Stick to a Budget
You need to learn how to start a budget. We have tons of budgeting resources for you.
While creating a budget is great, you need to learn how to use one.
You do not have to budget down to every last penny.
You need to make sure your expenses are less than your income and that you are creating sinking funds for those irregular expenses.
Budget Help:
7. Pay Off Debt Quickly
The amount that you pay interest on debt is absolutely absurd.
Unfortunately, that is how many of these companies make their money from the interest you pay on debt.
If you are paying 5% to even 20-21% or higher, you need to find ways to lower that debt quickly.
Here’s a debt calculator to help you. Figure out your debt free date.
Paying off debt fast is your target and main focus. I can tell you from personal experience, that it was not until we paid off our debt that we finally rounded the corner financially. Once our debt was paid off, we could finally be able to save money. Set money aside in separate bank accounts and pay for cash for things.
It took us working hard to pay off debt. We needed persistence and patience while we had setbacks in our debt free journey.
Here are resources now for you to pay off your debt:
Jobs that Pay $11 an Hour
You can always find jobs that pay $11 per hour. Polish up that smile, fill out the application and be prepared with your interview skills.
Job Search Hint: Always send a written follow-up thank you note for your interview. That will help you get noticed and remembered.
First, look at the cities that require a minimum wage in their cities. That is the best place to start to find jobs that are going to pay higher than the federal minimum wage rate. Many of the cities are moving towards this model so, target and look for jobs in those areas.
Possible Ideas:
Cashiers
Back of the house restaurant staff
Landscape Laborer
Retail jobs
Paraeducators at schools
Janitors
Farm help
Warehouse workers
$11 Per Hour Annual Salary
In this post, we detailed 11 an hour is how much a year. Plus all of the variables that can impact your net income. This is something that you can live off.
$22,800
In this post, we highlighted ways to increase your income as well as tips for living off your wage.
Use the sample budget as a starting point with your expenses.
You will have to be savvy and wise with your hard-earned income. But, with a plan, anything is possible!
Try one of these ways to make money quickly to help you in the interim.
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
For some, the new tax season might serve as a stressful reminder of past taxes that have yet to be filed and paid. Taxpayers owed over $120 billion in back taxes, penalties and interest in 2022, according to the IRS. And there soon may be more concrete reminders coming: The IRS resumed sending automated collection notices for unpaid taxes in 2024 after pausing them “due to the unprecedented effects of the COVID-19 pandemic” in February 2022.
If you’re one of the many taxpayers who owe tax debt this season, addressing the issue sooner rather than later can save you from penalties, interest and other more serious consequences. And you can get started even if you can’t afford to pay in full. Here’s what you can do to get back on track.
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If you get a notice, read it
The longer you delay reading and responding to unpaid tax notices, the more serious your tax situation could become.
“People come into our office, and they have all these unopened letters,” says Kenneth Portera, an enrolled agent and owner of Kenneth Portera and Associates in New Jersey who works with clients who owe back taxes. He wishes people would open these notices when they arrive, he notes. “If you do get a letter, open it up and find out what’s going on.”
If you continue to ignore notices, the IRS may resort to severe measures, including tax liens, wage garnishment, asset seizure and passport restrictions. And if you owe state taxes, you could face additional collections and garnishments.
However, the IRS and state tax agencies will always try to contact you before escalating to more extreme measures. If you show the agency that you’re willing to pay — even if it’s not the full amount — you can avoid the worst outcomes.
Set up a payment plan
Most taxpayers can set up short- or long-term payment plans, including installment agreements, through the IRS website. To apply for one online, you must owe less than $50,000 in combined tax, penalties and interest for a long-term plan or less than $100,000 for a short-term plan. The agency waives setup fees for low-income taxpayers and has options for businesses, too.
Once you contact the IRS and set up a plan, the government will stop sending notices about your tax debt because collection has already been accomplished, Portera says.
If you have an existing payment plan, you can update it to account for this year’s taxes.
Contact a pro
Not everyone with overdue taxes needs a tax attorney. But if you’re dealing with tax authorities, owe large amounts of money or have a tax situation that you feel unable to handle on your own, Portera recommends enlisting the help of a licensed tax professional, such as a certified public accountant, enrolled agent or tax attorney.
When you don’t file your return, the IRS puts together a substitute return for you with a proposed assessment of what you owe. This tax return the IRS files for you is “almost always going to be not in your favor,” says Robert Persichitte, a CPA at Delagify Financial in Colorado who has experience working with clients in urgent tax situations.
According to Persichitte, some tax preparers will look at your substitute return for free and tell you if it needs to be amended. Sometimes, a licensed tax professional can negotiate with the IRS to reduce the amount you owe. In serious cases, they may help you apply for an offer in compromise, an agreement with the IRS that settles your tax liability at a lower amount.
Remember, though, that tax relief isn’t usually a quick fix — and promises of a dramatic cut to your tax debt may be a scam.
“If it sounds too good to be true, guess what? It usually is,” Portera says. The process for negotiating a reduced tax bill is complicated, he notes. If a tax relief company can’t deliver and fumbles communications, he adds, it could result in more interest and penalties for you, and no resolution.
For low-cost options, contact the Taxpayer Advocate Service or your local Low Income Taxpayer Clinic, which provides free or low-cost assistance for low-income taxpayers.
Simple tax filing with a $50 flat fee for every scenario
With NerdWallet Taxes powered by Column Tax, registered NerdWallet members pay one fee, regardless of your tax situation. Plus, you’ll get free support from tax experts. Sign up for access today.
for a NerdWallet account
Transparent pricing
Hassle-free tax filing* is $50 for all tax situations — no hidden costs or fees.
Maximum refund guaranteed
Get every dollar you deserve* when you file with this tax product, powered by Column Tax.
Faster filing
File up to 2x faster than traditional options.* Get your refund, and get on with your life.
*guaranteed by Column Tax
Don’t forget about current tax returns
When taking care of overdue taxes, don’t forget to file taxes for 2023.
Even if you have overdue penalties — or don’t have the funds to pay this year’s fees in full — stay compliant with the IRS by filing your returns annually. The agency is much more likely to waive your penalties or even agree to reduce your tax debt if you have a history of compliance.
Claire Tsosie, an assigning editor at NerdWallet, contributed reporting to this article.
This article was written by NerdWallet and was originally published by The Associated Press.
MoMo Productions/ Getty Images; Illustration by Austin Courregé/Bankrate
Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.
Key takeaways
VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members and surviving spouses.
VA loans can be used to purchase a primary residence, refinance a current mortgage or cover renovation costs.
VA loans offer several benefits, including no required down payment, no private mortgage insurance (PMI) and competitive interest rates.
A VA loan is a great option for you if you’re a qualifying active-duty military personnel or veteran. They often have more relaxed financial requirements than conventional loans, requiring no down payment or private mortgage insurance. They also typically have lower interest rates than FHA and conventional loans.
Here’s a breakdown of what VA loans are, how they work and how you can get one.
What is a VA loan?
A VA loan is a loan guaranteed by the U.S. Department of Veterans Affairs (VA). That’s not to say the VA provides these loans. Instead, mortgage lenders offer VA loans, knowing that the government guarantees them. This makes lenders more confident in lending, often offering a VA loan with a lower interest rate than a conventional mortgage.
The VA doesn’t officially set a credit score requirement for these loans. Instead, it leaves this up to the lender, with lenders requiring anywhere from a 580 to 640 minimum score. VA loans don’t require a down payment, which can make homeownership more attainable for those who qualify because you’ll need less money upfront.
How does a VA loan work?
Getting a VA loan is similar to securing a conventional loan.
Basically, you fill out paperwork from the VA that verifies your eligibility for the program. You also receive what’s known as your entitlement, which is the dollar amount guaranteed on each VA loan. While VA loans technically have no loan limit, lenders might be willing to loan up to four times the amount of your entitlement.
You can get a VA loan with no money down and, unlike other loans, you won’t have to pay for mortgage insurance. That’s because the government guarantees your loan. However, you’ll need to pay a funding fee, which costs a certain percentage of the loan total. This fee keeps the program functioning so future veterans and service members can use it.
Types of VA loans
VA loan type
Description
VA mortgage
Allows qualified service members to purchase a home with no minimum down payment.
VA construction loan
Eligible service members can use this loan to build the home of their dreams.
VA rate-term refinance
Allows service members without an existing VA loan to change their loan term or secure a lower interest rate.
VA cash-out refinance
Allows service members to swap their conventional mortgage with a VA loan, with an option to turn home equity into cash if needed.
IRRRL loan
Allows service members to replace a VA mortgage with a VA Interest Rate Reduction Refinance Loan (IRRRL), which can offer lower interest rates. It can also be used to change from an adjustable-rate loan to a fixed-rate loan.
VA rehab and refinance
Can be used by service members to finance the cost of improvements made to the home.
VA jumbo loan
Allows service members to finance a home with a sales price exceeding the conforming loan limits.
Native American loan
Available to Native American veterans to help them purchase, build, improve or refinance a home located on federal trust land.
Who qualifies for a VA loan?
The VA sets service requirements for active-duty military personnel and veterans to qualify for a VA loan. You can check the full eligibility requirements on the VA’s website, but the basics are:
You’re currently on active military duty, or you’re a veteran who was honorably discharged and met the minimum service requirements.
You served at least 90 consecutive active days during wartime or at least 181 consecutive days of active service during peacetime.
Or, you served for more than six years in the National Guard or Selective Reserve.
If your spouse died in the line of duty, you may qualify for a VA loan.
The first step in applying for a VA loan is getting a VA Certificate of Eligibility (COE). This certificate shows the lender that you meet the VA loan requirements for eligibility.
How to apply for a VA loan Certificate of Eligibility (COE)
You can get a VA loan Certificate of Eligibility by applying through your eBenefits portal online or applying through your lender.
To apply, you need to provide some data based on your current status. Veterans need to provide a DD Form 214, and active-duty service members need a signed statement of service. A statement of service should include:
Full name
Date of birth
Social Security number
The date you started duty
Any lost time
Name of the command providing the information
Different requirements may apply for National Guard or Reserve members, as well as surviving spouses. You can find more information through the VA’s benefits website, or by speaking to a qualified lender.
Other VA loan requirements
You should also keep these VA loan requirements and rules in mind:
VA loan limit: As of 2020, if you have full entitlement, there is no limit on the size of your loan. However, your lender may impose its own terms, and your entitlement will still be pegged to conforming mortgage limits.
You do have a home loan limit if you have remaining entitlement: You have an active VA loan you’re still paying back; or you paid a previous VA loan in full and still own the home; or you refinanced your VA loan into a non-VA loan and still own the home; or you had a compromise claim (or short sale) on a previous VA loan and didn’t repay it in full; or you had a deed in lieu of foreclosure on a previous VA loan; or you had a foreclosure on a previous VA loan and didn’t repay it in full.
If you have remaining entitlement, your VA home loan limit is based on the county loan limit where you live. This means that if you default on your loan, the VA will pay your lender up to 25 percent of the county loan limit minus the amount of your entitlement you’ve already used. Check your county loan limit here.
Property type: Investment properties and vacation homes cannot be purchased using VA loan proceeds. Furthermore, you must occupy the home and use it as your primary residence.
Credit score: The VA does not specify a minimum credit score requirement. However, borrowers might have a hard time getting approved by a lender if they don’t have at least a 620 FICO Score.
Income: Borrowers need to show they have the income to make the mortgage payments. It’s equally important to not have a huge debt load since the lender will assess your debt-to-income ratio (DTI), or the percentage of your monthly income that’s spent on debt payments.
Assets and down payment: There is no down payment requirement for VA loans, but the lender may have overlays (or specific criteria) that mandate a down payment in place for borrowers with lower credit scores.
Reserve funds: Many lenders require borrowers to have an adequate amount of reserves — generally two to three months of mortgage payments — before clearing you to close on your loan.
It’s also possible to use home loan benefits after bankruptcy, as long as sufficient time has passed, typically two years after filing for Chapter 7 bankruptcy or 12 months after Chapter 13 bankruptcy.
VA home loan pros and cons
For those who are eligible, VA loans have many benefits, but they also have drawbacks to consider.
Pros of a VA loan
Some of the key advantages of VA loans include:
Lower borrowing costs: VA loans can be cheaper than their conventional mortgage counterparts.
No down payment: VA loans allow you to purchase a home with zero down payment, making homeownership more accessible for those who may struggle to save a large lump sum. You need at least 3 percent down for a conventional mortgage.
No mortgage insurance: Unlike many other types of mortgages, VA loans do not require you to pay private mortgage insurance (PMI), potentially saving you hundreds of dollars per month.
Competitive interest rates: Because the government guarantees these loans, lenders are able to offer lower interest rates than you’d typically find with conventional loans.
Capped lender fees: The VA limits lender fees (like loan origination fees) to 1 percent of the loan amount. This can result in lower closing costs than other loan types.
Cons of a VA loan
Despite the many benefits, VA loans also have a few downsides to consider:
VA funding fee: VA loans come with a funding fee that can vary depending on your military category, down payment amount and whether you’ve previously used a VA loan. You can finance this fee into the loan amount, adding to the total cost of the loan, or you can pay it upfront at closing.
Limited to primary residences: You can only use VA loans to purchase a primary residence, not vacation homes or investment properties. However, you can buy up to a four-unit property with a VA loan as long as one unit is your primary residence.
Not all properties qualify: Not every property will meet the VA’s minimum property requirements (MPRs), which can limit your potential housing options.
Longer closing process: The VA loan process can take slightly longer than other loan types due to extra steps such as the VA appraisal.
How to apply for a VA loan
After you’ve obtained your COE and are ready to apply, there are a few steps you need to take:
Gather your financial paperwork.
Look for lenders that offer VA loans.
Get approved for a VA loan through at least three lenders.
Compare each lender’s offer and choose the best option.
Shop for a home and submit an offer.
Have a seller accept your offer and get a signed purchase agreement with the seller.
Get a VA home appraisal and inspection.
Work with the lender through the underwriting process, promptly responding to questions and requests for documentation.
If you’re struggling with your VA loan, there’s extra help available. The VA can help you negotiate with your lender if you can’t make payments. With the help of the VA, it’s possible to avoid foreclosure through loan modification or other repayment plans. Call 877-827-3702 if you need help.
VA loan FAQ
VA loans can have term lengths of 10 to 30 years. In addition, they can be fixed-rate or adjustable-rate mortgages (ARMs). The interest rates for VA loans are typically lower than those for conventional loans, mainly because the VA guarantees a portion of the loan, which reduces the risk for the lender. These rates change frequently, so check Bankrate’s VA home loan rates to compare offers from different lenders.
A key feature of VA loans is the entitlement. This is the amount of the loan that the VA will guarantee to the lender if you default. There are two types of entitlement:
Basic entitlement: Up to $36,000 for loans worth less than $144,000, or 25 percent for loans of that amount or more.
Bonus entitlement: Up to 25 percent of the Federal Housing Finance Agency (FHFA) loan limit, minus the basic entitlement.
If you’re purchasing a loan that costs more than $144,000, the bonus entitlement can be used.
No, VA loans don’t require PMI or any other mortgage insurance. That’s because the VA loan entitlement usually amounts to more than 20 percent of the home’s value. However, while you won’t need to pay for mortgage insurance, you will have to pay a funding fee.
As with any mortgage, different lenders have various closing costs. You might need to pay for discount points, a credit check, VA appraisal fees, title insurance and other costs, including local and state taxes. While you don’t have to worry about PMI, you do have to pay a VA funding fee. Your VA funding fee depends on the size of your VA loan down payment, and whether it’s your first-time use of the benefit.
Down payment
First-time use
Subsequent use
0%-5%
2.15%
3.30%
5%-9.99%
1.50%
1.50%
10% or more
1.25%
1.25%
So, while a VA loan down payment isn’t required, it can save you money to make a down payment.
Quick note: Disabled veterans who receive disability benefits are exempt from the VA funding fee.
Also, it’s possible to wrap your VA closing costs into the loan amount. However, that increases how much you need to borrow and can cost you more.
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations.
If you’re interested in investing in a new vehicle, it’s not always easy to know what’s in your price range. Understanding your options and learning how to calculate your budget can determine what you can afford.
Discover how auto loans can enhance your ability to afford a range of vehicles, from brand-new cars to those with some mileage.
How to Calculate How Much Car You Can Afford
Calculating how much you can afford for your new car is a helpful step in saving money when you’re ready to make the purchase. Follow the next steps to calculate your budget effectively.
1. Calculate Your Car Payment Budget
There are two main expenses to consider when calculating your car payment budget: your down payment and your monthly payment.
Above is an example of how to calculate your monthly payment calculation. Let’s say you have a net monthly income of $4,500. Multiply your income by 0.10, or take 10% of your income. This number will be your estimated monthly payment. In this example, it would be $450.
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Monthly payment: We recommend spending no more than 10% of your monthly net (take-home) income on your monthly car payment. This doesn’t include other expenses like gas and maintenance. Round up to 15% to include all vehicle expenses.
Down payment: If you plan on purchasing a car, we recommend putting around 20% of the vehicle’s purchase price toward your down payment. The more you put down, the lower your auto loan will be.
2. Determine Which Auto Loan You Qualify For
You now have a better idea of how much you can potentially borrow based on your budget.
Several determining factors affect how much you can borrow, including:
Credit score: This will influence the annual percentage rate (APR) of the loan. Higher FICO® credit scores between 661 and 850 can lower your auto loan interest rate.
New vs. used: Auto loans for new cars typically come with reduced APRs.
Loan term: This is how long you’ll be repaying your auto loan. The average car loan term ranges between five and six years.
If you already have an auto loan, you can refinance and customize your loan with Credit.com. Try out our Auto Loan Calculator to simulate your current payment and find out what savings you can earn today.
3. Estimate Auto Insurance Cost
You should also factor in car insurance when considering purchasing a new vehicle. Factors like the make and model of the car, your driving history, and where you live can impact your insurance costs. Reach out to several insurance companies for quotes and get a clearer picture of what you’ll likely need to budget for insurance.
4. Calculate Your Purchase Price
It’s important to note your auto loan isn’t the total price you’re going to pay for your vehicle. There are other hidden costs you should be aware of beyond the number on the price sticker. Take note of these common additional costs:
Sales tax: This can be around 5% to 10% and may include local, county, and state taxes. However, not all states have sales tax, such as Montana and Oregon.
Documentation fees: These can range from $100 to $400, depending on your state.
Registration fees: These can range from $8 to $225, depending on the state.
What Car Options Do You Have?
You never want to put yourself in a financially vulnerable position if you can avoid it. That’s why it’s important to consider all of your purchasing options. Keep reading to understand how buying versus leasing can help you afford a car.
New Vehicle
Everyone wants a shiny new car, but it’s not always affordable. If there’s a particular type of vehicle you want, do some research to determine the vehicle’s current market value. That way, you’ll know exactly how much that car is worth and avoid purchasing a vehicle with an inflated price tag.
Used Vehicle
Purchasing a used vehicle can be the best route for those with a lower budget. Used vehicles tend to have considerably reduced prices compared to brand-new cars, leading to more affordable monthly payments. Additionally, used cars typically have lower car insurance costs.
Leased Vehicle
Leasing a car can be a great option for those who want a brand-new car, but would prefer lower monthly payments. There are drawbacks to this option, however, as the payments that go toward the vehicle don’t provide value and there are mileage limits. But if you don’t mind those drawbacks and like to try out different cars every couple of years, leasing is worth considering.
FAQ
Here are answers to some frequently asked questions about car affordability and monthly payments.
How Much Car Can I Afford Based on My Salary?
Determining your car affordability based on your net income is one way of estimating how much car you can afford. You should put 10% or less of your monthly income toward your car payments.
Annual Income
Monthly Car Payment Maximum
$30,000
$250
$40,000
$334
$50,000
$416
$60,000
$500
$70,000
$584
$80,000
$667
$90,000
$750
$100,000
$833
However, this doesn’t include costs such as fuel, parking, and maintenance. You can plan on dedicating about 15% of your monthly income to total vehicle expenses.
How Much Should My Monthly Car Payment Be?
Your monthly car payment will depend on a few factors, such as your auto loan interest rate, loan term, and how much you put toward your down payment. Your choice of vehicle and where you purchase it can also affect interest rates.
However, your monthly car payment should be around 10% or less of your monthly take-home pay. You can always choose to pay more every month to pay your auto loan quicker and save money on interest.
Shop for Auto Loans With Credit.com
Take your first step toward vehicle ownership by learning more about credit scores with Credit.com. Get your free credit report card today.
Kansas City, MO is the sixth-largest city in the Midwest with over 481,000 people calling it home. Like all big cities, Kansas City has some great amenities like shops, entertainment venues and incredible restaurants.
Kansas City has some perks that not every large city in the U.S. can boast, though. Like the infrastructure — it’s designed to make driving less of a hassle. Raise your hand if you can’t wait to stop spending hours in bumper-to-bumper traffic!
Another perk of living in this city is the low prices. The cost of living in Kansas City, MO is 6.3 percent lower than that U.S. average. That number has dropped in the last year, too, by 2.3 percent.
To find out whether this city is for you, you’ll need to see if it meshes with your budget. Can you really afford the average rent in Kansas City, MO when you add the following factors into the total cost of living?
Housing costs in Kansas City, MO
The biggest expense in your monthly budget is housing costs. Where you live and what you pay for rent will have a direct and sometimes radical impact on the cost of living in Kansas City, MO.
Housing costs in the city are only 1.6 percent lower than the national average. Interestingly, this is a 13.8 percent increase over the cost of housing in 2020. One reason for the increase is that the demand for housing is up but the supply is not meeting that need.
The average rent in Kansas City, MO is $1,540 per month. However, there are neighborhoods throughout the city where you’ll find apartments for much higher (almost $1,000 more) and those for much less. If you look for apartments in the River Market area, you’ll be happy to learn that the average rent in that neighborhood is $2,338. On the other hand, if you look in the River View neighborhood, you’ll find an average rental rate of $720 per month.
Average rent prices in cities near Kansas City, MO
If you’re not sure you want to live directly in this city or aren’t happy with the average rent in Kansas City, MO, another option is to find an apartment for rent in nearby cities. The following cities range from 15 minutes to more than an hour away from Kansas City, so far enough from the hustle and bustle but close enough to still enjoy time spent in the city regularly.
Home prices in Kansas City, MO
You aren’t limited to renting in Kansas City. You might find that purchasing a home is, overall, more affordable for you and your family.
According to Redfin, the average cost of a house in Kansas City is $250,000, an increase of over 11 percent since 2020. As with rentals, the housing market is very competitive with most homes getting multiple offers and selling for 2 to 6 percent higher than the asking price.
Monthly mortgage rates are a little cheaper than the average rent in Kansas City, MO. You’d pay $1,079 per month with a 5 percent down payment or $909 with 20 percent down.
Food costs in Kansas City, MO
Kansas City is one of those awesome cities where you can get big city amenities but you don’t always have to worry about big city prices. Take food costs as an example. On average, they’re 11.4 percent lower than the U.S. average, which is a somewhat significant decrease over last year’s costs (5.7 percent higher).
In fact, if you love to dine out, you’ll be happy to know that there are a lot of amazing restaurants that cater to people on a budget. Like Happy Gillis Café + Hangout, where you can get a delectable dish of biscuits and gravy for $5 or a salad for $4.50. Or, try their Roasted Heirloom Tomato Grilled Cheese, made with farm toast, cheddar, roasted heirloom tomatoes, parsley, garlic, scallions and greens — all for $9.
If you’re in the mood for some fine dining, international cuisine or other specialty eateries, you won’t be disappointed. Kansas City offers Italian, gourmet barbecue, classic fare (think 1950s cocktail party) and much more.
Buying food in Kansas City, MO
If you’re like most people, you’re re-thinking how to maximize your budget since so much is up in the air during the pandemic. Cooking most of your meals at home is one way you can cut food costs significantly.
Let’s take a steak dinner for example. In the U.S., a good steak dinner can cost between $28 and $119, depending on the cut of meat and the restaurant.
If you make a steak dinner for two at home, you can expect to pay:
Steak: $22.06 (for two steaks)
Potatoes: $2.43
Lettuce (for a salad): $1.46
Sweet peas: $0.98
Your total comes to $26.93. The U.S. average for the same meal (cooked at home) comes to $30.66. Not only will cooking at home save you a few bucks (compared to the national average), but you’ll still be able to enjoy an incredible meal without having to leave the comfort of your own home — or paying $119 for the same meal.
Utility costs in Kansas City, MO
Besides food, utility costs take up another large portion of your monthly budget and can increase the cost of living in Kansas City, MO. Depending on whether your landlord covers these costs or not, utility fees can even increase the average rent in Kansas City, MO.
Overall, utility costs here are 3.2 percent lower than the national average. The monthly median energy prices are around $157.44 in this city, whereas the U.S. average is $161.20. One reason for the lower costs is power usage, which might be lower in this city than others because the weather here isn’t quite as extreme in other parts of the country.
Other utility fees to add to your budget include cell phone service (between $10 and $90), water and sewage (average = $109.67 per month), internet (average = $60 per month) and cable ($25 to $65).
If you’re looking to save on utilities (and who isn’t), you might want to look for apartments in Kansas City, MO that offer eco-friendly amenities. The savings can add up over time.
Transportation costs in Kansas City, MO
The best way to get around Kansas City is in a car. The walkability and bike scores (48 and 43, respectively) are relatively low, mainly due to the lack of bike lanes. There are some walkable neighborhoods within the city — Old Westport, South Plaza and Downtown Loop — where you can get some exercise and do a few errands.
The public transit score is lacking as well (37), though there are some options like the Kansas City Regional Transit company (RideKC). The company has a Park and Ride option and multiple buses. Their Transit app helps with planning your ride as it provides real-time information. You can also pay for fares and passes via Freedom On-Demand.
Most residents own their own vehicle since doing so gives them the freedom to come and go according to their schedule, not that of a bus company.
Transportation costs in Kansas City, MO are 11.8 percent lower than the national average. Fuel prices are currently at $2.50 per gallon, compared to $2.76 nationally. The national average for maintenance like tire balancing is around $52.40. The cost in Kansas City is $44.60.
Other transportation costs that can increase the cost of living in Kansas City, MO include parking ($6 to $20 for 2 hours), vehicle registration fees and insurance.
Healthcare costs in Kansas City, MO
Kansas City healthcare costs are an average of 9 percent lower than the U.S. average. For example, a trip to your doctor for your annual check-up will cost around $86.34. Elsewhere in the U.S., the same appointment costs an average of $112.81, though some people pay upwards of $234.
Over-the-counter medications are around 7.08 percent less than the national average, while prescription costs are about the same as the U.S. average (only 0.035 percent difference).
It’s important to note that determining healthcare cost averages is often difficult. What you pay compared to your neighbors is going to vary, sometimes drastically so. The reason for this is not just the insurance company you choose or the plans they offer. Some people will have higher costs because they don’t have insurance. Others because they have chronic health conditions. Finding out how healthcare costs impact the cost of living in Kansas City, MO will take some sleuthing, but it will be worth it to see if living in this city is within budget.
Goods and services costs in Kansas City, MO
Miscellaneous goods and services are, on average, 7 percent cheaper than other cities in the U.S.
It can be hard to figure in all the costs that go into living your life in a big city, but you can get a somewhat accurate estimate by looking at the things you purchase with relative frequency. Things like:
Petcare (vet services, grooming, etc.)
Gym fees and exercise classes (or Peloton membership fees)
Plants, potting soil and anything else you need to create and develop an apartment patio garden
Let’s say you want to take your partner out to a movie. The tickets will cost around $21.42. The national average for a Saturday trip to the movies runs about $22.24 for a couple.
If you’re a fitness buff, the average gym membership in Kansas City is $45 per month. A yoga class will cost you around $15.60, which is $0.60 higher than the national average.
Though it’s not easy to try and calculate everything you spend your money on each month (or quarter or year), it’s important to get a general idea of how much you spend on miscellaneous goods and services. These fees can significantly increase the cost of living in Kansas City, MO, and might even make the average rent in Kansas City, MO out of reach.
Taxes in Kansas City, MO
Another factor to consider in determining the cost of living in Kansas City, MO is the tax rate in that city, as well as county and state taxes.
Kansas City has a 1 percent earnings tax rate. Everyone in the city who earns an income (even if they work outside the city) must pay this tax, which covers the city’s cost for:
Snow removal
Road repair
Trash collection
Police, firefighter, ambulance and paramedic services
Historic preservation
Code inspections
As a resident here, you’ll also pay 8.86 percent sales tax. The state sales tax in Missouri is 4.23 percent. City and county taxes make up the additional 4.63 percent. How does this translate to cash? Let’s say you find a must-buy item with a $1,000 price tag. In addition to paying $1,000, you’ll also pay $88.60 in sales tax.
Finally, if you decide to purchase a home in Kansas City, MO, you’ll have the added responsibility and expense of paying residential property taxes. The Jackson County tax rate is 1.35 percent. If you buy a $250,000 home, you’ll pay a little under $3,400 per year in property taxes.
How much do I need to earn to live in Kansas City, MO?
Whether you can afford the cost of living in Kansas City, MO depends on what you earn. On average, residents of Kansas City earn $54,194 annually. This is slightly higher than the national average of $51,916.
If you earn the average annual income, can you afford the average rent in Kansas City, MO? Rent in this city is approximately $1,540 per month or $18,480 per year. This is nearly $3,000 more than the oft-recommended 30 percent rental budget.
Though the price is higher, it doesn’t mean you can’t afford to live in Kansas City, MO. If you’re comfortable cutting costs in other areas (walking and biking as much as possible to save on fuel or eating out less frequently), you can afford the cost of rent in this city. Also, remember that there are several neighborhoods in Kansas City and suburbs around it that offer great rentals for lower prices.
If you’re curious whether you can afford to live in this city, be sure to check out our free rent calculator.
Understanding the cost of living in Kansas City, MO
There’s no flat rate when it comes to the cost of living in Kansas City, MO. As nice as that would be (talk about easy calculations!), we all have varying needs. And those needs result in different housing, food, tax and healthcare costs.
That said, for many people, the cost of living and the average rent in Kansas City, MO is quite affordable. Much more so than many large cities across the country.
If you’re one of those people who want to take the plunge and move to this fair city, make sure to check out our rental listings to find apartments for rent in Kansas City, MO that fit your budget.
Cost of living information comes from The Council for Community and Economic Research.
Rent prices are based on a rolling weighted average from Apartment Guide and Rent.‘s multifamily rental property inventory of two-bedroom apartments as of August 2021. Our team uses a weighted average formula that more accurately represents price availability for each individual unit type and reduces the influence of seasonality on rent prices in specific markets.
The rent information included in this article is used for illustrative purposes only. The data contained herein do not constitute financial advice or a pricing guarantee for any apartment.
The Internal Revenue Service (IRS) generally requires that you report a forgiven or canceled debt as income for tax purposes. But forgiven student loan debt is different.
The American Rescue Plan (ARP) Act specifies that student loan debt discharged between 2021 and 2025, and incurred for postsecondary education expenses, will not be counted as income, and therefore does not incur a federal tax liability.
This includes federal Direct Loans, Family Federal Education Loans (FFEL), Perkins Loans, and federal consolidation loans. Additionally, non-federal loans such as state education loans, institutional loans direct from colleges and universities, and even private student loans also qualify.
However, some states have indicated that they still count canceled student loans as taxable income. Read on for more information about which discharged student debt is taxable and by whom.
Different Student Loan Forgiveness Programs
Federal student debt can be canceled via an income-driven repayment plan (IDR) or forgiveness programs.
While President Joe Biden’s plan to offer federal debt cancellation of up to $20,000 to those with qualifying income failed — struck down by the U.S. Supreme Court — other forms of student loan forgiveness have been strengthened.
In October 2023, the White House announced at least $127 billion in student loan relief for nearly 3.6 million Americans:
• $5.2 billion in additional debt relief for 53,000 borrowers under Public Service Loan Forgiveness programs.
• Nearly $2.8 billion in new debt relief for nearly 51,000 borrowers through fixes to income-driven repayment. These are borrowers who made 20 years or more of payments but never got the relief they were entitled to.
• $1.2 billion for nearly 22,000 borrowers who have a total or permanent disability who have been identified and approved for discharge through a data match with the Social Security Administration.
Recommended: Guide to Student Loan Forgiveness
Whose Student Loan Cancellation Is Not Federally Taxed?
As stated earlier, under the provisions of the ARP Act, any student debt (private or federal) for post-secondary education that was or is forgiven in the years of 2021 through 2025 will not be federally taxed. This means that the borrowers just listed above were not required to report their discharged loan amount as earned income, and therefore taxable.
Outside of the special five-year window of tax exemption provided by the ARP Act, participants in the Public Service Federal Loan program who receive forgiveness also don’t have to worry about paying taxes on the canceled amount. The program explicitly states that earned forgiveness through PSLF is not considered taxable income.
Recommended: A Look Into the Public Service Loan Forgiveness Program
Whose Student Loan Cancellation Is Federally Taxed?
Borrowers who receive loan cancellation after participating fully in an income-driven loan repayment plan can generally expect to pay taxes. Again, those whose debt was discharged in 2021 and 2022, or will be discharged in 2023, 2024, or 2025, will not need to pay federal taxes on their forgiven loans.
Forgiven amounts that are taxable are treated as earned income during the fiscal year it was received. Your lender might issue tax Form 1099-C to denote your debt cancellation. 💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.
Which States Have Said They Will Tax Forgiven Student Loans?
Typically, states follow the tax policy of the federal government. But some states have announced that their residents must include their forgiven or canceled student loan amount on their state tax returns.
As of October 2023, the states that say forgiven loans are taxable are Mississippi, North Carolina, Indiana, Wisconsin, and possibly Arkansas, depending on an upcoming vote in its legislature. More states could decide to do so.
It’s important to consult a qualified tax accountant or someone knowledgeable about forgiveness of student loans in your state to confirm the latest information of how much you owe.
Preparing to Pay Discharged Student Loan Taxes
If you’re anticipating a tax liability after receiving loan forgiveness, there are a few steps you can take today to get ready.
Step 1: Estimate Your Bill
The first step when bracing for a student loan forgiveness tax bill is calculating how much you might owe come tax season. This factor can be influenced by factors including the type of forgiveness you are receiving and the forgiven amount.
To avoid sticker shock, you can use a student loan forgiveness tax calculator, like the Loan Simulator on StudentAid.gov. It lets you see how much of your student loan debt might be forgiven, based on your projected earnings.
Step 2: Choose the Right Plan
Enrolling your federal student loans into an IDR plan can help you keep your monthly payments to a manageable amount while you’re awaiting loan forgiveness. All of these repayment plans calculate your monthly payment based on your income and family size.
The newest IDR program is the Saving on a Valuable Education (SAVE) plan, which offers unique benefits that will lower payments for many borrowers, to as low as 5% of disposable income in 2024 for those who qualify.
Recommended: The SAVE Plan: What Student Loan Borrowers Need to Know
Step 3: Prioritize Saving
If you’re expecting loan forgiveness after 2025, it might be advantageous to allocate extra cash flow toward a dedicated tax savings fund. Incrementally setting money aside over multiple years can ease the burden of a sudden lump sum tax bill down the line.
Paying Taxes on Canceled Student Loan
If you can’t afford to cover an increased tax bill, contact the IRS to discuss your options. Inquire about payment plans that can help you pay smaller tax payments over a longer period of time. However, be aware that fees and interest will likely accrue. 💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.
The Takeaway
Thanks to a special law passed by Congress in 2021, post-secondary education loans forgiven from 2021 through 2025 will not count as earned income and will not be federally taxed. That said, state taxes may be due, depending on where the borrower lives.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
Is loan repayment considered taxable income?
If your employer offers loan repayment assistance benefits, they would typically be considered taxable income. However under the Cares Act, loan forgiveness payments — and employer assistance loan payments up to $5,250 — made each year from 2021 through 2025 are tax-free.
Will refinancing my student loans help me avoid taxes?
Student loan refinancing simply involves reworking one or more existing student loans into a new private loan with more favorable terms. It’s a repayment strategy that does not incur a tax liability.
Photo credit: iStock/fizkes
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.