Saving during tax season, with tax season upon us, you may need to consider some things when you have yours prepared. And now is also an excellent time to think about saving for an emergency fund, or better yet, after that, for your retirement.
Taxes
When filing your 2020 tax return, you need to be aware of a few things. First, if you did not get your two stimulus checks, you can obtain a refundable tax credit for the portion you did not receive. But do not try to claim this if you did get the full $1,800. That could cause some major issues.
Second, if you pulled money out of a 401(k) or Individual Retirement Account, you have some options on how to have these proceeds taxed. As they will be taxed as ordinary income, you may wish to spread the taxes over three years. To do this, you will need to spread the amount over 2020, 2021, and 2022 tax years in equal amounts. That way, you can defer paying the taxes over time and reduce your tax liability this year.
If you turned 70 ½ before January 1, 2020, you are not required to take your Required Minimum Distribution now until age 72. This means that a tax penalty would have applied if you did not elect to take your distribution. There is no penalty this year. But you could have still taken one without an issue. And if you were 70 ½ before the end of 2019, you would have been required to take the distribution. For more on this, please visit www.IRS.gov.
The final tax issue is a crossover to retirement. We will discuss this one in the next section but know that putting money in a deductible IRA will reduce your taxes by that amount provided you meet the income guidelines. But provided you do, you can reduce your taxable income by up to $7,000 depending on your age.
Saving Money in an IRA
I spoke to a client who has their own business and needed to reduce his income, and he did some work for him throughout the year for $6,000. He did not want to give these funds to his 18-year-old, so we opened him a ROTH IRA. If you earn what the average S&P 500 Index has done for the next 41 years, he will have about $250,000 tax-free at retirement just from one $6,000 deposit. Not a bad gift for your children if you own your own business.
If you are under the income limits for a Traditional IRA, you may wish to consider contributing to you and your spouse if married. That could reduce your income by $6,000 for each account and $7,000 for those over the age of 50. So, if you are under age 50 and married, that means you can reduce your taxable income by up to $12,000 while saving for your retirement. For more information on deduction, limitations visit www.IRS.gov.
Saving Money for an Emergency Fund
While talking to the same client, who is new to me, we discussed how they saved money for one of their children. He stated it was in a CD, and I instantly recommended an alternative for achieving the same goal. As of February, the best CD rate for a three-year CD with a minimum deposit of $1,000 pays an APR of 1.05%. Which to me is terrible. For more tips on saving money, see our previous post at KG Meyer, PC.
For those to read me consistently, you know I am a fan of Worth Bonds. They are SEC-registered securities that are backed by hard assets of a small and medium-sized business. They may be purchased for as little as $10 and pay a daily compound interest rate of 5%. That is what I call a good, safe and better alternative to purchasing a CD from a bank paying almost 4%. To learn more about Worthy Bonds and receive a free $10 bond when you open an account, visit Worthy Bonds.
And if you opt to have your emergency fund in a more accessible savings account, I recommend one of the online banks called Marcus, owned by Goldman Sachs. While it does not pay as well as a Worthy Bond, it pays 0.50% on any balance. And if you open an account by March 31, 2021, you can receive an extra 0.20% for three months by visiting Marcus.
For those in or around Nashville, Tennessee, or anywhere in the US in need of a Registered Financial Consultant, feel free to reach out to me directly.
