Do you want to save more this year? If so, you're not alone. Fifty-five percent of Americans listed “saving more money” as their top financial resolution for 2016, versus 20% who were looking to pay down debt, according to Fidelity’s Financial Resolutions Study.
So, are you saving enough—and saving smart enough? We suggest setting aside three to six months of expenses in an emergency fund. But after that, we believe saving for retirement should be most Americans’ top priority. After all, you can probably get loans to pay for children’s education, or for a house, a car, or for other financial goals. But beyond your Social Security retirement benefit, you’ll likely need to fund your own retirement paycheck. Here are eight tips, not necessarily in order, to help you save more and smarter this year. Depending on your situation, you might consider some or all of these. Take full advantage of any company match. If you have a 401(k), 403(b), or 457(b) plan and your employer offers a matching contribution, take full advantage of it. In addition to receiving the company match, you get the added potential benefits of any tax-deferred growth and compounding returns. Let's say, hypothetically, your company offers a match of 50¢ on every $1 you contribute, up to 3% of your salary. If you make $60,000 a year and contribute 3%, or $1,800, and your company kicks in another $900, your annual contribution could add up to $2,700. Assuming a hypothetical compound annual growth rate of 7%, your savings could grow to more than $37,000 in ten years.2 Contribute the maximum to your workplace savings plan. Saving just 3% a year is probably not enough to generate the savings you will need to retire, which could be hundreds of thousands of dollars or more for even basic expenses. So, try to contribute the maximum to your workplace savings plan each year. For 2016, the maximum is $18,000; $24,000 if you are age 50 or older. If you’re not quite saving to the max yet, consider increasing your savings rate by 1% per year until you reach a total savings rate of 15%. For details, read Viewpoints: “Just 1% more can make a big difference.”) If you think your tax rate will be higher in retirement than it is now, consider opting for a Roth workplace savings plan, if your employer offers one. With a Roth, you contribute after-tax dollars, but any earnings and dividends grow tax free, and withdrawals are also tax free if taken in retirement. To learn more, read Viewpoints: “Roth or traditional IRA or 401(k)—two tips for choosing.” Pay down high-interest debt. If you are paying more than 8% to 10% on credit card or other debt, consider using any extra savings to pay down the balance. If you have multiple accounts, you should work on the one with the highest interest rate first. Continue to make the minimum required payments on other debts (so you don't get hit with any penalties). When that first debt is paid off, consider putting your extra money toward paying off the one with the next-highest interest rate, and so on. As you pay off your debts, it should become easier to pay off the remaining debts, because you’ll have lower interest payments and therefore more money to work with. Continue the process until you're out from under all your high-interest debt. For debt you cannot pay off, consider consolidating it at whichever institution offers you the lowest rate, making sure the payment schedule matches your own goals and financial situation. Contribute to an IRA. Individual retirement accounts (IRAs) offer another tax-smart way to save for retirement. There are two basic options:
Consider a health savings account. If your employer offers a high-deductible health care plan (HDHP) with a health savings account (HSA), you may want to consider electing the HDHP and opening an HSA. It can be a tax-efficient way to save and pay for current and future qualified medical expenses, including those in retirement. Although your out-of-pocket health care costs may be higher depending on your health care needs, your premiums may be lower. Also, many companies contribute to an employee’s HSA, and employee contributions are made pretax, which means your net after-tax costs can be lower. And what you don’t spend in your HSA in one year can be carried over from year to year to cover future qualified medical expenses, including those in retirement. HSAs have a unique triple tax advantage3 that can make them a powerful savings vehicle for qualified medical expenses in current and future years: Contributions, earnings, and withdrawals are tax free for federal tax purposes To make the most of your HSA (if you have access to one and you can afford it), consider paying for current-year qualified medical expenses out of pocket and letting your HSA contributions remain invested in your HSA to pay for future qualified medical expenses, including those in retirement. The maximum annual contribution that can be made for 2016 is $3,350 for individuals enrolled in self-only coverage and $6,750 for individuals enrolled in family coverage. In addition, individuals who are at least 55 years old, are not enrolled in Medicare, and who otherwise are eligible individuals can make an additional catch-up contribution. The maximum catch-up contribution amount is $1,000 in addition to the max annual contributions ($3,350 and $6,750). To learn more, read Viewpoints: “Three healthy habits for health savings accounts.” Consider deferring compensation. If your company offers a nonqualified deferred compensation plan—and you have maxed out on other workplace savings options and still have the means—consider allocating some of your paycheck there as well. You can decide how much to defer each year from your salary, bonuses, or other forms of compensation. Deferring this income provides two tax advantages: You don't pay income tax on that portion of your compensation in the year you defer it (you pay only Social Security and Medicare taxes), and you can invest the money, so it has the potential to grow tax deferred until you receive it. But a deferred compensation plan is not for everyone—and the rules are complex, and there are risks involved that you wouldn't face with a qualified plan—so you'll want to weigh the pros and cons carefully before signing up. To learn more, read Viewpoints: “Nonqualified deferred compensation plans.” Consider deferred variable annuities. If you’ve taken advantage of your tax-advantaged workplace savings options and contributed to an HSA and IRA but still want to save more, you might want to consider deferred variable annuities. They typically allow you to invest in funds that hold stocks and bonds—and any earnings grow tax deferred. Unlike some of the options mentioned above, there are no IRS limits on how much you can invest in an annuity.
Remember other savings goals. It’s also important not to overlook saving for your other goals, such as college and graduate school for yourself, children, or grandchildren. Among the best ways to save for a college goal is a 529 college savings account, which is a tax-advantaged account designed to pay for qualified higher education expenses. For both types of accounts, qualified distributions are federal income tax free. To learn more, read Viewpoints: “The ABC's of 529 college savings plans.” To explore saving for an education goal, use our college saving tools. One last tip: To make it easier to stay on track with your savings goals, consider using direct deposit from your paycheck to your chosen savings vehicles, be they workplace savings plans, HSAs, IRAs, annuities, or even taxable accounts. Then give yourself a pat on the back—you’re a smart saver.
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The Internal Revenue Service announced today that the nation’s tax season will begin Monday, Jan. 23, 2017, and reminded taxpayers claiming certain tax credits to expect a longer wait for refunds.
The IRS will begin accepting electronic tax returns that day, with more than 153 million individual tax returns expected to be filed in 2017. The IRS again expects more than four out of five tax returns will be prepared electronically using tax return preparation software. Many software companies and tax professionals will be accepting tax returns before Jan. 23 and then will submit the returns when IRS systems open. The IRS will begin processing paper tax returns at the same time. There is no advantage to filing tax returns on paper in early January instead of waiting for the IRS to begin accepting e-filed returns. The IRS reminds taxpayers that a new law requires the IRS to hold refunds claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until Feb. 15. In addition, the IRS wants taxpayers to be aware it will take several days for these refunds to be released and processed through financial institutions. Factoring in weekends and the President’s Day holiday, the IRS cautions that many affected taxpayers may not have actual access to their refunds until the week of Feb. 27. “For this tax season, it’s more important than ever for taxpayers to plan ahead,” IRS Commissioner John Koskinen said. “People should make sure they have their year-end tax statements in hand, and we encourage people to file as they normally would, including those claiming the credits affected by the refund delay. Even with these significant changes, IRS employees and the entire tax community will be working hard to make this a smooth filing season for taxpayers.” April 18 Filing Deadline The filing deadline to submit 2016 tax returns is Tuesday, April 18, 2017, rather than the traditional April 15 date. In 2017, April 15 falls on a Saturday, and this would usually move the filing deadline to the following Monday — April 17. However, Emancipation Day — a legal holiday in the District of Columbia — will be observed on that Monday, which pushes the nation’s filing deadline to Tuesday, April 18, 2017. Under the tax law, legal holidays in the District of Columbia affect the filing deadline across the nation. “The opening of filing season reflects months and months of work by IRS employees,” Koskinen said. “This year, we had a number of important legislative changes to program into our systems, including the EITC refund date, as well as dealing with resource limitations. Our systems require extensive programming and testing beforehand to ensure we’re ready to accept and process more than 150 million returns.” Did you know that life events like marriage, divorce and retirement may have a significant tax impact? Organized by type of event, this page provides resources that explain the tax impact of each. Click the link to determine what to do in a case of a Life Event. (links are redirected to IRS.gov)
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