The IRA vs 401(k): Which is Right for You?

Every day adults are realizing more and more that they need to take control of their own retirement savings. Regardless of political affiliation, most can agree that the sand is running out of the social security system hourglass, and many of us will never see a dime for our efforts. Those of us that will, still need to think about a secondary income stream, as those checks will not be enough.

Every penny you are able to save now may be the difference between struggle and comfort later in life. There are some options at your disposal that allow you to invest in with tax-free growth. The IRA and 401(k) are concepts you may have read about or heard about on CNBC, but which one makes the most sense for you? One? The other? Both? Let’s work through this together.

What is an IRA?

An IRA, or Individual Retirement Arrangement, is an account that has special tax incentives, designed to help individuals save for retirement. As this is an individual account, employers are not involved in the set-up or funding of these accounts. In order to contribute to an IRA, you must have earned income for that year.

The two most common IRAs investors use are the Traditional and Roth IRAs. Here is some quick information on both:

• Traditional IRA – Depending on your tax filing status and income level (check chart below), your contribution may be tax deductible. All growth in an IRA is tax-free, and the owner pays taxes on any distributions as “income” in the year they make that withdrawal.

If Your Filing Status Is…	And Your Modified AGI Is…	Then You Can Take…
Single or Head of Household	$59,000 or less	A full deduction up to the amount of your contribution limit.
	more than $59,000 but less than $69,000	A partial deduction.
	$69,000 or more	No deduction.
Married filing jointly or Qualifying   widow(er)	$95,000 or less	A full deduction up to the amount of your contribution limit.
	more than $95,000 but less than $115,000	A partial deduction.
	$115,000 or more	No deduction.
Married filing separately	less than $10,000	A partial deduction.
	$10,000 or more	No deduction.
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “Single” filing status.

 

• Roth IRA – There are no tax deductions for Roth contributions. The growth is still tax free, and all withdrawals are also tax-free. There are income limits as to who can contribute to a Roth however. The income levels are:
  • Single/Head of Household – Above $127,000
  • Married Filing Joint – Above $188,000
  • Married Filing Separately – Above $10,000

What is a 401(k)?

The 401(k), which refers to the tax code in the Internal Revenue Code where this is created, is another tax-advantaged savings plan set up to help individuals save for retirement. This one, however, can only be used through your employer.

The 401(k) allows individuals to take money from their paycheck “pre-tax” and place it in a special investment account. It lowers your taxable income in the year that you make the contributions and the money grows tax-deferred like an IRA.

How Much Can I Contribute?

IRA

The Traditional and Roth IRA have the same 2013 maximum allowable contribution of $5,500 per year. Anybody at the age of 50 or older can make an additional “catch-up” contribution of $1,000 for a total of $6,500.

401(k)

The amount of money you are allowed to contribute to a 401(k) in 2013 is $17,500. Anybody at the age of 50 or older can make an additional “catch-up” contribution of $5,500 for a total of $23,000 per year.

Is There an Employer Match?

IRA

No. This type of account is setup by an individual person and not connected to their employment. Therefore no employers are involved in this account in any way.

401(k)

YES!  This is the big advantage of 401(k)s. Most employers will offer some type of matching contribution. If there is a match in your 401(k), it is in your best interest to participate enough to take complete advantage of the full amount offered by your employer. To not do so would be like leaving money on the table!

What Can I Invest In?

IRA

You can usually invest in many different investment products in an IRA, ranging from safe to risky. Some examples are:

• CDs
• Bonds
• Equities
• Mutual funds
• ETFs
• Annuities

401(k)

Each employer set-up 401(k) plan offers a variety of investment options, but it is limited compared to an IRA.

Withdrawal Rules and Penalties

Both the Traditional IRA and the 401(k) allow you to start taking withdrawals penalty-free at the age of 59 1/2. Any earlier withdrawals come with a mandatory 10% penalty by the IRS (called an excise tax). All withdrawals are also listed as current year income and taxed at the current tax rate. There are some exceptions to the penalty. Please research on your own to see if you would qualify.

Roth IRA contributions (the principal) but not the earnings can be withdrawn after five years tax free. However, restrictions do apply!

Required Minimum Distributions

The IRS has Required Minimum Distributions (RMD’s) for both Traditional IRAs and 401(k) accounts, starting with the year that you reach 70 ½ years of age or, if later, the year in which you retire. That means that you are required to take out a certain minimum percentage each year (and pay taxes on it) and are penalized if you do not.

There are no required minimum distributions at any age for Roth IRAs.

Which One Should I Invest In?

In a perfect world, where you qualify to use both, the answer is just that; both! Every individual and every situation is different. Verify that your employer has a 401(k) and an employer match. See if you qualify for tax deductible contributions to an IRA. Do some of your own due diligence and never hesitate to speak with a financial planning professional. The only mistake you make is in doing nothing.

What are you investing in right now? Leave a comment and let us know!

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Tax Time: What’s Your Filing Status?

One of the most basic items you need to tackle at tax time is your filing status. Your filing status dictates your tax bracket, as well as whether or not you are eligible for certain tax deductions and credits that are based on income.

Your tax filing status depends on your marriage situation, as well as whether or not you have dependents to support. Your tax filing status is largely based on your situation on the last day of the year, as well as what you have done to support others for at least six months of the year.

Here is a brief overview of the 5 different tax filing statuses:

Single

If you are unmarried on the last day of the year, or if you can be considered unmarried due to a legal separation, you usually file single. However, if you are claiming a dependent, and you have provided support for more than six months of the year, you might qualify to file as head of household – a status that comes with more tax benefits than filing as single.

Realize that for federal tax purposes, same-sex marriages are not recognized, even if you are legally married in your state of residence. You are considered single as far as the IRS is concerned.

Married, Filing Jointly

For many couples, this is a common filing status. If you are married, you can file a joint tax return, and this can provide you with a number of tax benefits. With a joint tax return, you combine all of your income together, as well as your deductions and credit.

You accept full responsibility for the return when you sign it, which means that if your spouse has been committing fraud, you could be on the hook for it. There are some instances where you receive dispensation for your spouse’s indiscretions, but, generally, a joint return means you act as one.

Married, Filing Separately

If you are married, you can choose to file separate returns. You each report your own income, and you need to coordinate your tax returns. You either both have to claim the standard deduction, or you both have to itemize. Additionally, there are a number of deductions and credits that you are completely ineligible for if you file separately.

If you are a same-sex couple, understand that you can’t use this filing status. Even though it might be tempting, since you are still filing separate returns, you can’t file as “married” in any form when it comes to your federal income tax return.

The main advantage to married, filing separately is that you can keep your tax liability separate from your spouse’s. This can be the smart play if you think that your spouse has been committing tax fraud, or if you are worried about being responsible for your spouse’s tax situation.

Head of Household

The head of household filing status provides you with a little bit of a better tax benefit than filing as a single, and recognizes your contributions to caring for a dependent. In order to file as a head of household, you need to be unmarried (or considered unmarried due to legal separation) on the last day of the year, pay more than half the cost of keeping up a home for the whole year, and a qualified dependent must has lived with you for more than six months (except in the situation of a parent, but you still have to provide the support).

Qualifying Widow or Widower with Dependent Child

If you used to be eligible to file a joint return, but your spouse died, you can take advantage of this filing status. Your spouse has to have died during one of the two preceding tax years, and you have not remarried during the tax year. Additionally, you need to maintain a home for a qualifying dependent child.

Carefully think about your situation, and choose the tax filing status that makes the most sense for your situation.

How are you planning on filing? Leave a comment!

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How to Spend Using Google Wallet

For the last couple of years, we’ve been hearing about the advent of the digital wallet. Coupons can be downloaded to phones, and the barcodes scanned at the register. Lately, though, the buzz has been about near-field communication (NFC) technology that allows you to tap your phone – or wave it – in front of a point-of-sale terminal and pay using your smartphone.

The digital wallet has been coming for some time now, whether it’s Visa’s version, or the Google Wallet. But how many consumers actually have a digital wallet? And is it practical to spend money using something like the Google Wallet? The time might have come.

Google Wallet Shows Up at My Grocery Store

Yesterday, for the first time in two weeks (the produce box and milk I have delivered weekly to my door has cut my trips to the store dramatically), I went to the grocery store. As I pulled out my debit card to swipe, I noticed that the store had new point-of-sale terminals. Right there, on the top, was a small sign proclaiming that the terminal accepted Google Wallet.

If the local grocery store in my secluded small town has Google Wallet capability, it must really be coming. Spending with Google Wallet isn’t as straightforward as just using contactless payment with your smartphone, though.

How Google Wallet Works

Here are the steps you need to take in order to get your Google Wallet to work:

1. Set up a Google Wallet account and download the app to your compatible smartphone.
2. Link credit and debit cards to the account.
3. Designate a preferred card to be used.
4. Use your smartphone to pay at stores where the proper hardware is installed to accept Google Wallet.

Google Wallet works by issuing you a virtual MasterCard account number. This MasterCard account is connected to your linked credit and debit cards – whether they are Visa, MasterCard, American Express, or Discover. When you pay offline, it’s the virtual account number that is given to the merchant (except in certain cases involving Citi MasterCards). Then, your preferred card is charged later. When you use Google Wallet for online purchases, your preferred card is charged directly.

Note that you can’t add certain cards to your Google Wallet. Store-specific gift cards can’t be added, and you can’t use FSA debit cards with your Google Wallet, either.

This situation is desirable in many cases, since it can prevent thieves from capturing your “real” information from transactions. Plus, the information on your linked cards is stored online, and not in the phone itself. If your phone is lost or stolen, you can deactivate Google Wallet, and wipe all the data related to the app. This can be helpful if you are concerned about fraudulent purchases.

Can Google Wallet Really Replace a “Real” Wallet?

One of the questions that many ask is whether or not a digital wallet like the one offered by Google can really replace a “real world” wallet. I admit that the idea is tempting. Carrying all that stuff around with you can be annoying, and we’re fast becoming a society where our lives can be toted around in the palms of our hands.

But something like Google Wallet is far from replacing the “real” wallets we have. First of all, until they digitize your driver’s license, you’ll still have to carry that around as a hard-copy. On top of that, there are some merchants that will be a little slow to adopt compatible technology. And you can’t rule out the small cash-only businesses that exist. Plus, if something malfunctions with your phone or with the terminal at the store, you are going to need a backup.

So, while spending with Google Wallet and other digital wallets is probably on the rise, it will be awhile before we see smartphones completely replacing the hardcopy version.

Have you used Google Wallet? How do you feel about it? What do you think about the idea of digital wallets in general? Leave a comment!

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American Express Blue Cash Everyday vs. Blue Cash Preferred

If you look at all the cash back reward cards, you will find there are three distinct types. Some offer a fixed rate on all purchases, usually around 1-2%. Others combine a fixed rate on most purchases with increased rates of cash back that apply to selected categories merchants that change each quarter.

Recently, I drew a comparison between the major cards of this type, all of which offer 5% cash back on eligible transactions and place limits on the amount you can receive. But my favorite way to maximize my cash back bonus from my reward credit cards is by choosing a card that offers elevated levels of cash back on certain types of purchases with no limits. In this field, two of the best products are the American Express Blue Cash Everyday and their Blue Cash Preferred. With these cards, it is not so much a question of which is best, but which card is ideal for your particular needs. Let’s put them head to head and see which comes out on top.

American Express Blue Cash Everyday

Key Features

As a cash back credit card, the American Express Blue Cash Everyday starts off users on the right foot by offering $100 as a sign up bonus after cardholders use it to spend $1,000 in their first three months after opening an account. Cardholders earn 1% cash back on most purchases, 2% back at gas stations and in department stores, and 3% back at supermarkets. Cardholders receive their rewards as a statement credit each month that their cash back balance reaches $25 or more.

As with most American Express cards, customers also receive car rental and travel accident insurance, extended warranty coverage, and roadside assistance. There is no annual fee for this card, but there is a 2.7% foreign transaction fee on all charges processed outside of the United States.

Should You Get It?

The defining characteristic of this card is that it offers bonus cash back on key categories of “everyday” spending, without charging an annual fee. This makes it a no-brainer for cardholders who don’t charge enough on their cards each year to justify an annual fee, or those who simply refuse to ever pay an annual fee for a credit card.

American Express Blue Cash Preferred

Key Features

Think of the Blue Cash Preferred as being like the Everyday version, but much more so. Instead of $100 as a cash back bonus, it offers $150. Rather than getting by with a decent 3% cash back at grocery stores, it offers an astounding 6%. And it even bumps up the nice 2% cash back that at gas stations and grocery stores to an even better 3%. The only downside is a $75 annual fee and the same 2.7% foreign transaction fee.

Should You Get It?

When it comes to two nearly identical cards that offer different rates of cash back and different costs, the best card can be determined simply by mathematics. If a cardholder spends at least $2,500 per year at grocery stores, or about $48 a week, the Preferred card will always be a better deal. That is because for each $2,500 spent at grocery stores, the Everyday card will only earn $75, while the Preferred card will earn $150. And that extra $75 is equal to the cost of the annual fee. Furthermore, this calculation doesn’t even take into account the extra 1% cash back that the Preferred card offers for purchases at gas stations and department stores.

Finally, applicants should also consider that the additional $50 sign up bonus for the Preferred card reduces the difference in price to a mere $25. In fact, American Express is essentially paying Preferred card holders $75 to use this card for their the first year. Another way of looking at it is that the first two years annual fees are refunded in advance as a sign up bonus. Unless a cardholder just hates the idea of annual fees on principle, it is hard to justify going with the Blue Cash Everyday over the Blue Cash Preferred.

Other Considerations

Both of these cards feature a 0% introductory APR on new purchases for 12 months. As with all reward cards, these two products have higher standard interest rates than other, more competitive cards. In this case, the standard APR will be 17.24%, 20.24%, or 22.24% depending on the applicant’s credit worthiness. Therefore, I always recommend that anyone who tends to carry a balance skip reward cards. If those who carry a balance must use a credit card, find one with the lowest possible interest rate. In addition, both have American Express’s onerous 2.7% foreign transaction fee. When you consider that, and the fact that not all merchants take American Express, it is best to have a Visa or a MasterCard as a backup, preferably one without foreign transaction fees.

Another consideration is the fact that not all purchases are eligible for the higher levels of cash back. The terms for these cards exclude purchases from warehouse stores and discount clubs such as Costco and Sam’s Club. In addition, only fuel purchases from stand alone gas stations earn more than 1% cash back. Be sure to keep these restrictions in mind when using these cards.

Maximizing Cash Back

There is one really cool trick that reward card gurus have discovered. Cash back at supermarkets is earned on all purchases made there, including gift cards. And since most supermarkets now stock a wide variety of gift cards from other merchants, it is possible to extend your cash back savings far beyond groceries. In fact, a clever ‘hack’ is to purchase prepaid Visa debit cards at the supermarket using the Blue Cash Preferred. When purchased in $500 denominations, the 6% cash back ($30) will far outweigh the typical $4-$6 fee.

By selecting the version of this card (the Blue Cash Everyday or Blue Cash Preferred) that offers you the most possible cash back, it is easy to use either one to earn outstanding rewards without having to remember what the bonus categories are every time you use it.

Which card sounds best to you? Leave a comment!

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The Best Personal Finance Tracking Software

If you want to improve your finances, it helps to have a solid idea of what is going on. Unfortunately, we as humans have a pretty poor ability to track what we earn and what we spend. As a result, it helps to have some sort of method of keeping track outside our heads.

For the longest time, pencil and paper, in the form of a checkbook register and/or ledgers, was the preferred method. Now, though, it’s possible to get personal finance tracking software that can help you stay up to date with ease, including applications for your mobile devices.

Not only that, but most personal finance software applications will use your data to create visually appealing graphs that clearly illustrate your situation, and reports that detail your past spending. You can even use some personal finance tracking software to create projections of possible outcomes if you keep on with your current actions.

What is the Best Personal Finance Software?

There are many different personal finance software programs out there, and what you decide to use depends largely on your goals, your money style, and your current financial picture. There are basic budgeting apps that do little more than allow you to track your spending quickly and easily, and there are more involved programs that will even keep tabs on your investment portfolio.

Personally, I have long been a fan of Quicken. It’s what I used for years. However, when the Mac operating system stopped support Quicken 2005, I knew I was in trouble. The new Quicken has proved to be fairly powerful, and Windows users seem to like it. However, Mac users don’t have the same experience with the new Quicken. So, right now, I use Moneydance. It’s not quite as awesome as Quicken 2005, but it has a similar ledger set up, and it makes reconciling my statements each month fairly easy. Plus, I can enter information about my investment accounts and loan accounts.

If you are more into old school money management with straightforward features, Quicken is a great choice. And if you are looking for a Quicken alternative, Moneydance will do. Both of these programs allow you to link your accounts online, to make tracking that much easier.

But what about other personal finance tracking software? Here are a few suggestions for great personal finance tracking software for a variety of needs and goals:

• Mint: This is one of the most beloved budget tracking apps. Link up your accounts, and see where your money is going. Quickly see your spending, and watch for trends. Use that information to change your habits.
• YNAB: Mint is more about seeing where your money has already gone. YNAB is about actually giving your money a job. This is one of the more active personal finance tools, since it doesn’t automatically link your accounts. It requires you to think about your spending ahead of time and plan out your expenditures. This software is perfect for those who like the concept of zero-based budgeting.
• Personal Capital: If you’re ready to add investments into the mix, Personal Capital is a great personal finance tracking app. Not only do you get the budget tracking aspects, but you also get portfolio management help, and a look at your assets.
• LearnVest: This is another great software application that provides you with the ability to see all your assets. Plus, you can pay for planning services that help you create a five year plan.
• ReadyForZero: Get help paying down debt with this program. You can create a personalized debt repayment budget, and then track your progress.

No matter your goals or situation, there is a personal finance software program to fit your needs.

What’s your favorite personal finance software? Leave a comment!

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Mint Review: A Free Online Budgeting Program You Might Like

One of the most popular personal finance applications out there is Mint.com. Not too long ago, Mint was bought by Intuit, the same company that puts out Quicken. And I’m going to be honest. One of the reasons I was disappointed with the latest version of Quicken (other than the fact that the new version for Apple’s OS X is terrible and not worth buying) is that it looks less like the awesome Quicken 2005, and more like Mint.

What Mint Offers

Mint is popular because it makes it easy to track spending, and you can put together a budget fairly easily. Because Mint connects to your accounts, it updates your situation regularly. Mint will take the information from your checking, savings, and credit card accounts, using the login information you provide, and display it for you.

Because Mint is web-based, you can access your financial information from anywhere with the Internet. You can also download an app for your mobile device, and keep the information with you while you are on the go.

On top of that, it’s possible to set up your own categories, and even set up alerts for bills and other items of importance. Mint makes use of attractive visuals to help you find trends in your spending, and keep track of how much you have spent in certain budget categories.

Mint is good for tracking your spending, and determining whether or not you are making progress with your budget. You can see your financial information in one place, and it’s updated with information right from your accounts.

Where Mint Falls Short

For the most part, Mint is a rather simple budget tracking application. You can see where you are at right now, and see what you’ve been doing with your money. However, the options when it comes to tracking your investment portfolio aren’t as robust.

If you want to keep up with your investments, you might be better served to use an application like Personal Capital. Quicken and Moneydance (I use Moneydance) also allow you to keep up with your portfolio, but you might have to manually enter items.

Additionally, there are some complaints by users that income and expense categories aren’t always accurate, and that sometimes manual corrections are needed.

Should You Use Mint?

Mint is free to use, since the site makes money by recommending savings and other financial products to you. If you sign up for what Mint recommends, the service gets a kickback.

If you want to track your spending, and you are interested in getting help making a budget, Mint might be just the ticket. It’s simple to use and visually engaging. Additionally, it takes the effort out of tracking your spending.

Personally, Mint is not my personal finance software of choice. I prefer to manually enter most of my transactions, since I find that it helps me spend more consciously. Additionally, I like the more traditional ledger look of Moneydance.

And, as I mentioned before, if you have more complex finances that include investments, Mint probably won’t meet your needs. You will need to supplement in other ways.

Think about your own financial needs, and then decide whether or not Mint is the best personal finance software for you.

Do you use Mint? Leave a comment and let others know what you think!

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Is Rental Property a Good Investment for You?

Let’s forget about the last five or six years for a moment – historically, rental property has been one of the best investments available. Not only can you use rental income to pay the carrying expenses on the property, but equity builds up over time creating large future investment windfalls. In addition, rental property can be leveraged so that you’re getting a higher return on your upfront investment.

That’s traditionally how rental properties worked, and it’s a solid bet that it will eventually return to that status in the future. What’s more, the real estate collapse of the past few years has lowered prices to where rental property makes more sense than it has in a very long time.

Though some people are well suited to invest in rental property, most aren’t. Potential returns can be very high, but rental property is a more complicated investment than most others. How do you know if rental property a good investment for you?

Why Investing in Rental Property Can Work for You

This list certainly isn’t all-inclusive, but it considers both market factors and personal preferences.

1. You want a venture that is largely passive and won’t take up too much time.

If you are looking to create additional income streams, rental property is a way to do it without having to put in the kind of time that would be required for a more traditional business. Rental property isn’t completely passive, but once you get it up and running it can close to take care of itself with only minimal involvement from you.

2. You don’t like the investment alternatives.

With a lack of credible investment options, rental property could be the best place for your money. The stock market is near record highs and looking a little top-heavy, and interest rates on fixed income investments are at record lows. But if you can get a rental property that will at least break even on a month-to-month basis, your return will come in the form of either future real estate appreciation, the gradual pay down and payoff of the mortgage, or combination of both. In addition, you’ll have more direct control over a rental property investment than you will over stocks and bonds.

3. You’re looking to invest in something tangible.

Most investments today are sitting in paper – stocks, bonds, certificates of deposit, treasury securities. Even commodity futures involve paper, since you never actually take physical possession of the assets. If you’re looking to invest in something tangible, there are basically two choices: precious metals and real estate. Precious metals provide no income, and can be highly speculative. Rental property on the other hand, has rental income, and holds the prospect of rising equity in the future. Not only is it something you can put your hands on, but you can also wrap your mind around exactly what it is.

4. You’re a hands-on repair type.

If you’re handy when it comes to repairs, rental property could be your niche. That doesn’t mean you have to be able to perform all repairs, but you if you can at least size up a job and know what will be involved, you’ll have a big advantage going in.

5. You’re seeing bargains all over the place.

As a more practical matter, house prices are down in most markets and way down in some. This creates a real buying opportunity for real estate investors. Not only are general price levels down, but you can often get real deals on short sales and foreclosures. This provides an opportunity to buy rental property at well below market prices. If you do that, the carrying costs on the property will also be lower, raising the prospect of a positive cash flow from the start.

Why You Might Want to Avoid Investing in Rental Property

As noted at the beginning of this post, rental properties are not the right investment for everyone. Here are some reasons why it may not work for you.

1. Your financial profile isn’t what it needs to be.

Now that we’ve been through the mortgage meltdown, mortgages are harder to get in general, but nowhere more so than for rental property. Mortgage lenders took a big hit on loans for rental property during the meltdown, and have imposed significant restrictions. You’ll have to have larger down payments, more reliable income sources and better credit than investors in the past. Your credit and financial profile will have to be up to the task.

2. You don’t like very long-term investments.

Rental property is a long-term investment in the true sense. While you can sometimes buy properties on the cheap and then flip them for a sizable profit, the soft housing market has made that difficult to do in a lot of areas. You will have to buy a property, and then wait for mortgage amortization and higher prices in the future to provide your return. Also, rental property isn’t nearly as liquid as other investments. If you decide you want out you won’t be able to make that happen with a phone call or a mobile app the way you would for stocks or mutual funds. It could take a year or more to sell a rental property. If you don’t want your money tied up for that length of time, rental property is probably not for you.

3. You don’t like midnight repair calls.

One the un-anticipated tasks of a landlord is shielding tenants from property related issues. If you own a house that you live in, you will be responsible for any repairs that need to be done. But as a tenant, if something breaks down, you pick up the phone and call your landlord. And it always seems to happen around midnight! If this is not an arrangement that works for you, rental property will not be a good idea.

4. You don’t want investments you’ll have to actively manage.

On the income side, rental property is pretty passive. Rent checks come in, and you use that money to pay the bills associated with ownership of the property. But management becomes more active when repairs are needed or when a tenant moves out and needs to be replaced. At times like these, rental property can seem more like a heavy part-time job than a passive activity. If you like your investments completely passive – the way stocks and bonds are – rental property may not be a good fit for you.

Unlike other investment types that are more conventional in nature, owning rental property will have an effect on your personal life and on your financial situation. You can’t just wake up one day and decide you want to invest in rental property. It’s a venture that requires planning as well as consideration of your personal circumstances. Though it can be highly profitable, you need to consider all factors before making an investment.

Do you own rental property, or have you owned any in the past? What would you advise someone who is considering buying rental property?

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2 Big Risks Your Homeowners Insurance Probably Doesn’t Cover

Homeowners typically believe that they will be covered by their homeowners insurance no matter what the disaster is. And while it’s true that you will be protected against most disasters, there are two big risks your homeowners insurance policy doesn’t cover: floods and earthquakes.

These two threats have such potential for destruction that they are considered to be beyond the scope of a traditional homeowners insurance policy. In order to have coverage for either risk, you’ll have to have a separate policy specifically to deal with that threat.

Flood Insurance

Anytime you get a mortgage on your home, the mortgage lender will require that you have a flood insurance policy in place if your property is located in a designated flood zone. These flood zones are determined by the frequency of floods that have occurred in a location over the past 100 years. If the area is likely to be flooded during major storms it will be considered to be in a flood zone and flood insurance will be required.

That part is easy enough to understand.

Where it gets sticky, however, is when flooding occurs in properties that are not located in designated flood zones. The fact is, any area or property can become flooded if the wrong combination of circumstances takes place. All it takes is a big enough storm, like a hurricane, or the destruction of nearby flood control reservoirs and waterways.

This is actually the worst flooding outcome possible because you won’t have a flood insurance policy as a result of not being located in designated flood zone. And your homeowners insurance carrier will not cover the damage since it resulted from flooding.

You may need flood insurance coverage even if you aren’t in a designated flood zone and your mortgage lender didn’t require you to have it. Unfortunately, most homeowners – eager to keep their monthly house payment as low as possible – decide against getting flood insurance. And since the area that they live in won’t typically flood, they will feel comfortable in their decision.

But a single damaging flood can result in tens of thousands of dollars worth of damage to your property. If you are not located in a flood zone, you can obtain flood insurance for as little as $200-$300 per year. That’s a small price to pay compared to the cost of virtually rebuilding your house after a single flood disaster.

If you don’t have flood insurance because you are not located in flood zone, consider adding a policy anyway.

Earthquake Insurance

Since most areas of the United States are not subject to destructive earthquakes, most homeowners don’t concern themselves with the potential risk. If you are located in an earthquake zone, an earthquake insurance policy can be prohibitively expensive. This is especially true if you live on or near a fault line.

But even areas that are not prone to earthquakes can experience them. The threat is generally less severe than it is for flooding, but once again a single episode can cause substantial damage. The problem can be magnified by the fact that your home almost certainly has not been built to withstand earthquakes, as homes generally are in earthquake prone areas. It will take less destructive force then to damage your home than would be the case on a structure that is located in an earthquake prone area.

If you are not located in an area that’s subject to earthquakes you can obtain a policy for very little money. Sure, the chances that you will experience a destructive earthquake are slim, but all it will take is one disaster and you’ll be wishing you had coverage.

Never assume the worst can’t happen!

Flood or earthquake insurance can seem completely unnecessary in area that is not prone to either threat. But it’s another one of those items that comes under the category of it’s better to have it and not need it, than to need it and not have it.

One of the considerations when you own something as valuable as a home is the need to protect it from the most destructive of disasters. Though the threat from either a flood or an earthquake may be low in your area, the results of either event would be truly catastrophic. While you may be able to pay out-of-pocket for a tree falling on your roof, an uncovered flood or earthquake could force you to abandon the property for lack of funds to repair it.

The low risk/high cost kinds of disasters are precisely the ones you need to have insurance for. Floods and earthquakes fit easily into that category. With floods and earthquakes starting to happen in areas where they traditionally haven’t, you will do well to be prepared. Look at your insurance policy and see if you have this coverage.

Do you carry either flood or earthquake insurance, even if you don’t live in an area that is prone to either threat?

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7 Reasons You Need an Accountant for Your Small Business

With the various inexpensive tax software packages available today, many people have fired their accountants and are going the do-it-yourself route when it comes to preparing their income taxes. This can be an excellent idea when it comes to individual income taxes. But if you have a small business you could be setting yourself up for disaster.

There are at least seven reasons why you need an accountant for your small business.

1. The tax code is even more complex than you assume.

The flood of tax software packages has caused many people to believe that the tax code is simpler than it is, or that it can be more easily mastered as a result of the software. Neither assumption is really correct.

The US income tax code is so complex as to be beyond human understanding. There are basic rules, but every one of those rules has exceptions and special circumstances – and different rules will apply in each situation. Unless you are preparing hundreds of income tax returns each year, you can be completely unaware that you are violating a tax law until you get a written notice from the IRS. By then will be too late.

2. Taxes for a business are more complicated than for an individual.

Taxes for individuals are relatively straightforward. In addition, periodic changes to the tax code tend to be very well-publicized when it comes to individual income taxes. This happens because the greatest number of people will be affected by the changes, and those are exactly the type of stories the media like to report.

Much less well-known however, are the many changes that occur for small business and corporate income taxes each year. Many of the regulations and subsequent changes are so specific that they apply only to certain industries. All of this leads to far greater complication for business income taxes. For this reason, it’s best to have a dedicated professional, like an accountant, to handle your income taxes each and every year.

3. You’re more likely to be audited and then you’ll need representation.

As a business owner you generally face a greater chance of being audited than you do as an individual with a job and a W-2. This is because business owners have greater opportunity to either concealed income or to inflate expenses. The IRS is well aware of this and targets businesses, especially as income levels rise.

If you are audited, you’ll be face-to-face with an IRS agent will know far more about the tax code that you ever will. Your best defense will be to have an experienced tax professional – like an accountant – not only preparing your taxes, but willing and able to backup anything the returns contain.

4. An accountant can deal with routine tax matters.

When you are in business, there’s far more than just income taxes. The tax authorities have created a battery of taxes that affect small businesses, but are generally out of sight from salaried taxpayers. Only an accountant will know what those taxes are, if you need to pay them, and how to go about it if you do.

Even if you are not incorporated, there can be unincorporated business tax, various intangibles taxes, sales tax, annual registration fees, municipal taxes and any other type of tax you can think of. Compliance with most of these taxes will be easy – if you are an accountant. If you are not, you can easily get snowed under by them.

5. You may need a financial statement prepared.

Another real advantage of having accountant is that you can have financial statements prepared anytime you need them. And you never know when you will. Sometimes you need financial statements for regulatory or tax compliance, and you will need them if you want a loan from a bank or any other source.

An accountant can prepare these easily and quickly, because that’s what they do. In addition, financial statements prepared by third parties, such as accountants, have far greater credibility than one that you can run off your computer by yourself.

6. You have better things to do with your time.

If you are running your own business, that needs to be where your time goes. The last thing you want to do is get caught up preparing financial statements, filing income taxes, and dealing with the plethora of government regulation that plagues all businesses.

Though it may seem less expensive if you do these functions yourself, it will actually cost you more because of the time that you will be pulled away from your main business tasks. And then there are the mistakes you can make out of pure ignorance; there’s no way to estimate what that will cost until it happens!

7. Peace of mind.

Finally, there’s the emotional benefit of having an accountant. You have enough to worry about by running your business, you don’t need to be worried about regulatory and tax issues as well. Even though you’re in business for yourself, you should always partner with experts who are strong in the areas that you are not.

Having an accountant can be a form of business insulation. While you are going about managing the routine matters of your business, your accountant is keeping you insulated from the general business environment. That keeps your mind clear to work on what is most important rather than to fret over matters that are not entirely clear to you.

Yes you can save money with tax and accounting software packages, but nothing replaces hands-on expertise. An accountant can free you from these concerns, allowing you to concentrate on your work and even enabling you to sleep better at night.

If you have a small business, do you have an accountant? Or do you try the DIY route? Leave a comment!

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5 Things You Can Learn from Your Explanation of Benefits

A few weeks after a healthcare visit, you should receive what is known as an “explanation of benefits” (EOB). The EOB provides information about your visit, as well as information about what the insurance company covers, and your end of the bill.

When you receive your EOB, it’s important to read through it, since there are some important things you can learn from this document, including:

1. Indication of Identity Theft

Look at the date of your healthcare visit on your EOB. Did you, or someone listed on your health insurance policy see someone on that date? If not, that could be an indication that your identity has been stolen for medical purposes. This happens more than you might think. In fact, my sister’s identity was once stolen by a co-worker and used during a hospital admission. Carefully comb through your EOB for red flags that indicate that someone else is using your identity for healthcare services.

2. How Much Medical Services Cost

Curious about how much your healthcare costs? The EOB can help you out. It lists how much the visit, procedure, or lab work costs, and you can see exactly how much the health insurance company is paying, and how much you are paying. This is information you might be able to use later. It can also give you an idea of how much services should cost, allowing you to identify billing errors on future EOBs.

3. How Much of Your Deductible has Been Used

In many cases, your EOB includes information about how much of your deductible has been used up to this point. You can see how much you still have to pay. Additionally, many EOBs also include information about how many preventative care visits you have had, and how many you have left, so you know where you stand in terms of making a co-pay.

4. Why a Claim was Rejected

Did you have a health insurance claim rejected? If so, the EOB can provide you with information about why your insurer decided not to pay the claim. The reason might be that you don’t have coverage in the policy for that condition, or that you didn’t get pre-approval for a treatment, or that the healthcare provider neglected to submit all the necessary information. The wrong billing code might also have been used. If your claim has been rejected, look a little deeper into the situation. If it’s a mistake, the claim can be resubmitted and possibly paid.

5. What You Owe

It’s important to understand that your EOB isn’t a bill. However, it can show you how much you still owe your healthcare provider. The difference between what the service provider charges, and what the health insurer actually pays is what you owe. Additionally, most EOBs have a section that indicates “your responsibility” somewhere on the documents. You should see a bill from your healthcare provider shortly after receiving your EOB. That is what you will need to pay. And it doesn’t matter how small the number is. There have been times that I have had to pay $3.62 or even as little as $1.97. It’s all numbers and computations.

What other things can you learn from the explanation of benefits sent by your health insurer?

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