Can balance transfers backfire?

The average American had $6,354 in credit card debt at the end of 2017 which continues the upward trend of recent years, and many people might be looking for a balance transfer after overspending during this year’s Christmas shopping season.

The benefits of a good balance transfer card are that a person with existing high-interest credit card debt can get as low as zero percent interest rate for up to 21 months. That can allow them to focus on the debt itself without worrying about interest charges slowing them down, according to The Simple Dollar.

Without proper preparation, however, balance transfers can backfire.

Balance transfers still require work and sacrifice to totally clear the debt. Bad spending habits and a lack of budgeting probably created the debt in the first place. Transferring a balance might save you interest, but it won’t save you from bad habits.

One of the worst things to do is continue to use an old credit card while trying to pay off a new one, racking up even more debt in the process.

This includes falling into the trap of wanting to use the credit card to access the rewards for things like presents for the family at the end of the year – they are not worth it if there is a balance at the end of the month.

The only way to clear out debt with a balance transfer is to divide the total balance by the number of interest-free months. That is the monthly payment you must make to ensure your profit from the balance transfer.

This payment will likely be much higher than the minimum required but paying only the minimum amount will not make much progress toward total payoff.

You’ll get the best deals on a balance transfer with a great credit score. The best scores can attract offers of zero interest for close to two years.

A strict monthly budget can help carve out extra money to pay down debt. Focus on absolutely perfect payments to increase your credit score.

Tax moves to make before year-end

As April’s tax deadline looms, there are some things you can do before Dec. 31 to cut your tax bill.

First, use any extra money to make a final contribution to an IRA or 401k. This makes a tidy deduction in taxable income. In 2018, those limits are $5,500 and $18,500, respectively.

Don’t forget that unused money in a flexible medical spending account will be lost at the end of the year so use the balance to stock up on eligible household items like bandages, vitamins, and sunscreens.

Homeowners that plan to itemize their deductions should think about squeezing in an extra mortgage payment at the end of the year, something that adds to a deduction and pays your house off sooner.

One significant change in the 2018 tax code caps the deduction for state and local taxes (SALT) at $10,000 for any combination of property, income, or sales-related taxes. For those with expensive homes in high property-tax states, this can be a hit. For example, New York’s average deduction last year was $21,000. The deduction cap won’t affect the average homeowner outside coastal and metro areas.

According to Quicken, the end of the year is also an excellent time to make energy-efficient improvements such as insulations, roofs, or doors that can qualify for up to $500 through the Residential Energy Tax Credit.

According to Quicken, the end of the year is also an excellent time to make energy-efficient improvements such as insulations, roofs, or doors that can qualify for up to a $500 credit.

Many people can gain a small advantage in their taxes by selling investments that lost money during the year and using the losses to offset capital gains on a dollar-per-dollar basis, up to $3,000, on the ones that did well. Extra losses can also be carried over to future tax years, meaning one particularly lousy year can spread out over time.

Additionally, donating cash to charity is deductible, but it is important to remember that unwanted items can be given and written off at current fair market value as well.

Dilemma: Buy big or big enough

Dilemma: Buy big or big enough
Buying a house might come down to a choice: A big-enough house or the biggest house you can afford?

The choice you make affects not just your wallet, but your lifestyle as well.

Many considerations go into the house you buy and they are just as important, if not more so, than square footage.

According to the National Association of Realtors, the median size of an existing single-family home purchased in 2017 was 1,930 square feet, down from 1,950 square feet in 2016. Square footage in new construction also decreased slightly from 2,473 in 2015 to 2,419 in 2016.

Location is a big factor. If a house is just big enough, but close to work, it could be a better choice than the big homestead. Be sure to figure in the cost of a commute in time and money before choosing the larger house over the just-big-enough house.

Consider neighborhood. Older neighborhoods might have smaller houses, but they also can have stable housing values. For example, buying new construction can be satisfying, but once newer houses are built in the tract, older houses can decrease in value. On the other hand, you still have a new house with all the security that implies.

One thing you don’t want to do is buy a house that is too small. Allow some consideration for guests or just a home office.

Think ahead to your future financial needs. Buying the largest house you can afford will lock you into high payments for not just a mortgage, although that is the most dramatic cost, but also higher utilities, taxes, insurance and repairs over the time you own the home. Some of those funds could be directed to retirement, for example.

Here is an example from the Wall Street Journal: If your smaller home saves you $20,000 each year over the life of the mortgage, you could invest that amount. That investment during the same time in a stock market portfolio making 4 percent could add up to a $1.2 million retirement fund.

It’s also possible to buy smaller but remodel over time. Pick a smaller home in a desirable neighborhood and renovate.

 

In 2018, you can contribute more to your 401(k)

There’s good news for 401(k) savers in 2018: They can put $500 more into their plan.

The IRS has announced that the 401(k)contribution limit has been raised to $18,500. That is the first increase since 2015.

The new limit also applies to 403(b), Thrift Savings Plan and 457 plans.

The limit on catch-up contributions for employees age 50 and over remains the same at $6,000.

The deduction phase out limit was also increased. This means that if your Modified Adjusted Gross Income exceeds certain ranges, the amount you can deduct is reduced (or phased out).

Single taxpayers: The phase out is $63,000 to $73,000, up from $62,000 to $72,000.

Married filing jointly: Phase out rises to $101,000 to $121,000, up from $99,000 to $119,000.

Individual contributors: The phase out range rises to $189,000 to $199,000, up from $186,000 to $196,000.

Roth IRA and traditional IRAs

There was no change in contribution limits for IRA and Roth IRA plans. The maximum you can contribute to a Roth IRA is $5,500 per year (or $6,500 if you are age 50 or older).

There was a change to deduction phaseouts, though. If your Modified Adjusted Gross Income exceeds certain ranges, the amount you can deduct is reduced (or phased out).

In 2018, the phase-out levels are higher. For singles or heads of households, the Modified Adjusted Gross Income range is $120,000 to $135,000.

For married couples filing jointly, the range is $189,000 to $199,000. The phase-out ranges for married filing separately have not changed.

 

Is it better to buy or rent a home in retirement?

The kids are gone, the house is paid for, and you are ready for retirement. The question is whether keeping the house is the best idea.

According to USA Today, as many as 46 percent of seniors aged 65 or older are deciding to rent a home rather than buy a new house or keep their previous one.

There are pros and cons to each option.

For someone who already owns their own home with no monthly mortgage payment to worry about, it might seem an obvious choice to keep the house. According to the Motley Fool, this house can be used as a source of income in retirement through a line of credit or a reverse mortgage if there is a sudden need for extra money. On the other hand, annual upkeep eats up as much as 1 percent to 4 percent of the value of the house each year. These expenses can add up quickly on an older home. Then there are property taxes and homeowner’s insurance. Meanwhile, it is entirely possible that a housing market crash could erode the value of the home right when it is needed the most.

On the flip side, selling a home near or during retirement when the market is priced right could add a lot of cash flow and savings to draw from in the event of an emergency. The idea here is that cash can be invested and might be worth more over time than the house’s appreciation.

Kiplinger’s took a look at several scenarios involving home ownership, selling, and renting to decide which option made the most financial sense. They determined that in the short run renting was the better choice while buying a new home was more profitable after ten years or more. They also noted that it could be possible to pay yearly rent with interest gained from investing profits from the sale of a home.

Remember too that retirement is also about freedom. Separate from the financial aspects, renting a home could allow retirees to move around to different parts of the country more easily rather than worrying about having to sell or maintain a house from a distance.

Never use a Roth IRA as an emergency fund

Roth IRAs are unique retirement tools in that they allow the owner of the account to withdraw their original deposits from the account at any time without penalty. Because the accounts are funded with after-tax money, Uncle Sam doesn’t have to worry about getting a cut as money moves in and out of the IRA. This feature could lead some people to use their Roth IRA as a sort of emergency fund if they have no other savings to draw from.

According to The Simple Dollar, however, it is not a good idea to use the account in this way because most of the gains will be lost with a withdrawal and only so much can be contributed over a lifetime. Say that a 25-year-old deposited the $5,000 yearly limit and wanted to see how much this would turn into when they retire in 40 years. At 7 percent interest compounded annually, there will be $74,872 when they turn 65. Taking that $5,000 back out when they are 30 to cover an emergency will result in only $21,489 over the same time frame. Taking money out early might sound good in the short term, but it will be disastrous for long-term financial security.

Basic Social Security strategies for couples

Social Security is, like many government programs, rife with confusion.

For those nearing retirement age, it would be wise to plan now to create the benefits strategy that will maximize their retirement income while allowing them to enjoy life how they wish.

Most experts, such as those at USA Today, recommend using benefit optimization software or an advisor to find the ideal outcome since there are a myriad of situations that affect benefits.

Maximize Benefits by Delaying (70/70)
Mathematically, delaying social security benefits until both partners have reached the age of 70 will normally maximize potential benefits. This is true because according to the Social Security Administration, benefits rise an average of 8 percent per year (for those born after 1943) for each year delayed past full retirement age until the age of 70.
Delaying will ensure the maximum possible income for both partners.

The 66/70 Strategy
This strategy works best if both partners are about the same age and have earned similar incomes throughout their careers. In this scenario, it could be best to use what’s called a restricted application.

Forbes outlines the plan by explaining that one partner will first file for benefits promptly at age 66. Immediately after that, the other partner will file a restricted application for spousal benefits (50 percent of the other partner) and begin collecting those. Meanwhile, the second partner will receive benefit increases over the next four years while they continue to work.

After four years, the second partner files for their own benefits which will end their spousal benefit and put both partners on their own full retirement amounts. If both partners are destined to live a very long life this strategy may not be ideal, but it does offer a good mix of income and life enjoyment!

An Argument for Claiming Early
Most experts agree that claiming social security benefits early is a poor choice, but Fidelity Investments says it can make sense in some cases. If one or both partners are experiencing health issues or expect to have a shorter life expectancy for any reason it might be worthwhile to take benefits as soon as possible to maximize enjoyment during those non-working twilight years!

Your house pays you back at tax time

When you do your taxes this year, it probably won’t be much of a comfort to know that in February 1913, the personal income tax was born.
Bravo.

But the good news is that if you will be writing out a check this year, you might want to ask yourself if a nice, fat mortgage interest deduction would come in handy next year.

For many people, it certainly will. Mortgage interest is tax deductible. This means it is one of the expenses that reduces the amount of income on which you pay taxes.

Many, if not most, people who do not own houses, also do not itemize their deductions. That makes sense because if they added up all their potential deductions, the deductions would not be greater than the standard deduction. For 2016 the standard deduction for heads of household will also rise to $9,300 (up from $9,250 in 2015) but the other standard deduction amounts will remain the same: $6,300 for singles and $12,600 for married couples filing jointly. Personal exemptions will be $4,050 in 2016, up from $4,000 in 2015.

The beauty of the mortgage interest deduction is that it allows you to deduct all the interest you pay on your home loan. During the first years you pay on a home loan, nearly everything you pay is interest — up to 75 percent of your payment.

That nice deduction can reduce the taxes you owe, while allowing you to live in the house you want.

Owning a home also offers you some subtle protection from inflation. Inflation is an increase in the general level of prices for goods and services over time. So you notice that your grocery bill is going up and your dollars buy less, that is inflation, according to investopedia.com.

According to inflationdata.com, in 2016 inflation was about 1.7 percent. For 2017, Kiplinger’s predicts inflation to head to 2.5 percent.

Meanwhile, mortgage rates are ranging from 4.2 percent to 5.2 percent on 30-year fixed rate. That is an increase of at least 2 point from 2015 and 2016 but still very low.

If you buy a home this year, and inflation continues to increase, you’ll soon be paying off your home with cheaper dollars. Your food will cost more; your luxuries will cost more; rent will cost more. But your mortgage is going to stay the same.

Meanwhile, inflation will also have some effect on home prices, forcing prices up. Right now, in most parts of the country, home prices are low because there are a lot of houses on the market and fewer buyers than five years ago. That means, right now you can get a lot of house for fewer dollars. In coming years, however, as the supply of houses for sale decreases, the pressure of inflation plus a reduced supply of houses, will force home prices up. In 10 years, your home purchase today will be a bargain and you will be living in a home you love while paying prices locked in the past! It’s like being a financial time travel!

Living longer means planning for later life

With Americans living longer than in the past, planning for long-term care has become a priority.

In March, the results of a Nationwide Retirement Insurance survey revealed that many women over the age of 50 are hiding a big retirement worry from those they love: the fear of burdening family if long-term care is needed. But, it doesn’t have to be such a worry, or such a secret. With planning ahead of time, people can feel secure in their futures.

Some of the issues families must consider:
1. Housing: Will Dad sell the house and move to a long-term care facility if he can no longer live alone? Does he agree? Has he chosen some places he likes? If he does not agree, what are the options for the family?

2. Health care: If mom stays healthy and active, she may avoid the move to long-term care. It could be helpful now, while she is strong, healthy and of sound mind, to create a living will or health care directive that lays out exactly what they want to happen if they get sick and need long-term care. Getting that information on paper and signed can help to protect her and ensure that wishes will be followed if they cannot make those decisions on their own.

3. Legal decisions and planning: There are several documents that are helpful and important in situations where long-term care is a possibility. The first of these is a living will or health care directive, as outlined above. The second is a health care power of attorney. This designates a specific person to make medical decisions if a person cannot make them.

4. Financial planning: Long-term care can get expensive. To reduce this expense and stress, it is important to consider purchasing a long-term care policy that will pay for costs when that help is needed. Having long-term care insurance can lessen the financial impact.

Stealing from your future self

According to one investment expert, each $5 cup of coffee you buy at age 30 costs you $225 in retirement.

Phil Davis, author of the investment newsletter philstockworld.com, writes that $10,000 invested at 10 percent can turn into a half million in 40 years.

And how do you get to the $10,000? Look at your lifestyle: A $10,000 cheaper car, fewer fancy vacations, and maybe a less expensive cup of coffee.

It’s a good lesson to remember that each $10,000 spent at age 30, costs about $450,000 at age 70.