Ladder Life Insurance Review – Flexible Coverage With No Exam Up to $3M!

Finding the right life insurance policy is vital.

It could all be over in the blink of an eye, so you need to be prepared. At the same time, you have to be practical about the cost of monthly premium payments if you’re living on a budget.

If you’re looking for a term life insurance plan that is entirely online and can be increased according to your life insurance needs through the years, then Ladder may be the perfect answer.

Join us as we take a look at what this budding online insurance services provider has to offer.

History of Ladder

Ladder is a subsidiary of the company Ladder Financial Inc., which came into existence in 2015.

As a life insurance services provider, they are practically in their infancy as they only launched their life insurance division in 2017. Throughout 2017, they primarily limited their operations to the state of California.

Today, they offer life insurance throughout the United States.

While the company’s life insurance division is relatively new, it does not mean that you should not take them seriously.

Ladder offers life insurance issued by  Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, which have long, proven histories of paying claims.

How to Apply With Ladder

One of the most endearing features of Ladder is that you can apply for their plans almost entirely online in about 5 minutes. And you can get a decision immediately.

Applications for up to $3M in coverage are 100% digital, with no medical exams. However, there are some exceptions because some clients applying for more than $3M in coverage may be required to take a medical exam.

If you apply for life insurance through Ladder, you have to answer in-depth questions about your physical and mental health, your income, lifestyle, and your driving record.

Of course, you’ll need to provide your details as well, which include your social security number. While these questions and information may be personal and feel invasive, they are all vital in ensuring the quote will be accurate.

If you want more than $3 million in coverage, you may not be eligible for the no medical exam policy with the company.

In that case, they may send a medical technician to either your office or your home. The technician will collect blood and urine samples, and take a blood pressure reading along with other factors to gauge your health accurately.

This will delay your application process, and it can take a week or maybe more.

Ladder Life Insurance Policies

Ladder offers level term life insurance policies.

Term insurance is a policy that provides coverage to holders for only a specified amount of time.

If the policyholder passes away during the specified period, the beneficiary, usually the spouse, child, or even parent of the insured person, will receive the payout for the plan.

As a level term life policy, the premiums on the plan do not change for the entire duration of the policy.

Ladder’s term policies are available in the following durations:

• 10 years
• 15 years
• 20 years
• 25 years
• 30 years

One of the great things about Ladder is its no medical exam policy. If your application is approved, you can get a term policy that covers as low as $100,000 and as high as $8 million.

That is an impressive amount as most online life insurance companies only offer up to a million dollars without a medical exam.

Moreover, you can easily adjust your Ladder policy depending on your current financial needs. The best part is you can do it online, and it is as simple as logging in and updating your details.

There are two options available to you in case you want to adjust your policy. You can apply to Ladder Up your policy, and this involves increasing the value of your policy or extending the length of your plan’s term.

Why would you want to do this? Well, let’s say one of your siblings passes on unexpectedly and he or she leaves their family behind and no significant insurance policy. This may get you thinking about how you may want to help ensure that your family is adequately covered, so you adjust your plan and increase its face value.

You can also opt to Ladder Down, so you can reduce your policy’s face value to reduce your life insurance payout. Therefore, you reduce your monthly premium payments.

Why would someone want to do this? Well, let’s say your child has just graduated and received a job in another state, and you and your spouse are now living alone.

If this is the case, then you may not need as large of a payout anymore. And, more importantly, it may be better to put the savings from the lower monthly premium payments towards a savings fund for when you reach 60.

Ladder Life Insurance Riders

As previously mentioned, like most online insurance options, Ladder only offers term life policies.

But, unlike other companies, they do not offer riders that will allow you to customize your coverage.

Let’s say you want to get an Accidental Death, Double Indemnity, or Accelerated Death Benefit Rider to increase the payout on your life insurance. It would be best to apply to a different company.

Who Can Get a Ladder Policy?

Anyone aged 20-60 can apply for a term insurance policy through Ladder, barring rejection due to certain health issues.

But Ladder is better for some people in certain situations due to the Ladder Up and Ladder Down options. If you expect your life insurance needs to decrease over time or if you are currently struggling to afford enough life coverage, then the life insurance Ladder offers may be perfect for you.

The Pros and Cons of Ladder

Pros

High-value Term Life Insurance Policies

One of the most significant advantages of Ladder is the face value that you can get from their plans.

As previously mentioned, policies can range from as little as $100,000 to as high as $8 million, which is impressive when compared to other online companies.

Policy Scaling

The ability to scale your coverage depending on your current needs is incredibly convenient.

Moreover, the Ladder Up option is straightforward. Other online insurers would usually not allow this unless you cancel your current plan first and purchase a new one. With Ladder Life, added coverage would mean an adjustment in your monthly premium.

More importantly, you can easily adjust your plan from the comfort of your own home.

Quick Application Process

You can easily apply online and get a decision within minutes of completing your application. And, if you’re applying for up to $3 million in coverage, a medical exam won’t be required.

Cons

Coverage is limited from ages 20-60

Ladder only offers insurance to people between the ages of 20-60. So, if you’re looking for a term life policy that extends late into your senior years, then this is not the option for you.

Limited to Term Life Insurance Policies

If you’re not comfortable with a defined coverage end date, meaning that you have to die within a specified period for your family to benefit from your plan, then you’ll need to find another insurer that offers permanent life insurance.

No Riders

As mentioned previously, Ladder does not provide additional or supplementary coverage with their plans, unlike other online insurance services providers.

Bottom Line

If you’re looking for a DIY insurance plan and you do not like to interact with an agent, then Ladder is a clear choice for you.

You can easily apply for a policy online and get a decision quickly.

The ability to scale your plan according to your needs is vital to any practical individual in today’s world of uncertainty.

Term Insurance Policy Through Ladder

Ladder

• Term Life Insurance Policies
• No medical exam for up to $3 million term life coverage
• Decision on your application in as little as 5 minutes.

Ladder Insurance Services, LLC (CA license # 0K22568; AR license # 3000140372) offers term life insurance policies: (i) in California, on behalf of its affiliate, Ladder Life Insurance Company, Menlo Park, CA (policy form # P-LL100CA); (ii) in New York, on behalf of Allianz Life Insurance Company of New York, New York, NY (policy form # MN-26); and (iii) in all other states and the District of Columbia on behalf of Allianz Life Insurance Company of North America, Minneapolis, MN (policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to issue life insurance in the state of New York.  Insurance policy prices, coverages, features, terms, benefits, exclusions, limitations and available discounts vary among these insurers and are subject to qualifications.  Each insurer is solely responsible for any claims and has financial responsibility for its own products.

The post Ladder Life Insurance Review – Flexible Coverage With No Exam Up to $3M! appeared first on Cash Money Life | Personal Finance, Investing, & Career.

source https://cashmoneylife.com/ladder-life-insurance-review/

2022 Maximum HSA Contribution Limits – How Much Can You Save for Your Medical Expenses?

Table of Contents

1. What is a Health Savings Account?
   1. Health Savings Account Eligibility
   2. Advantages of HDHPs
   3. Tax Advantages of Health Savings Accounts
2. 2022 HSA Contribution Limits
3. What Happens If I Contribute Too Much to an HSA?
4. Can You Contribute if You Aren’t Eligible for the Entire Year? Pro-Rated Contribution Rules Explained
5. Benefits of Maxing Out Your HSA Account Each Year
   1. Using Your HSA as a Super Retirement Account
   2. Benefits of Long-Term HSA Ownership
6. Where to Open an HSA Investment Account
7. Conclusion

Health Savings Accounts, or HSAs, are growing in popularity among people who need affordable health insurance and among employers looking to save on health insurance costs.

HSAs have many benefits beyond cost savings. Let’s dive in and take a look at what exactly is a health savings account, the HSA contribution limits for each calendar year, how HSAs are one of the most flexible financial accounts you can open, and why it’s a good idea to max out your annual HSA contributions.

What is a Health Savings Account?

Health Savings Accounts are a type of tax-advantaged savings account explicitly for health care spending. Contributions are tax-deductible in the year they are made, and grow tax-free. Withdrawals are tax-free when used for qualified medical expenses.

In essence, a Health Savings Account is very similar to a combination of a Traditional IRA (tax deduction when you contribute) and a Roth IRA (no taxes on qualified withdrawals for medical expenses).

This is a huge benefit!

Health Savings Account Eligibility

To be eligible for an HSA, you need to participate in a qualifying High-Deductible Health Plan (HDHP) for health insurance.

A plan may qualify as an HDHP if the deductibles are $1,400 per year or higher for individuals, or $2,800 per year or higher for a family plan. These deductibles are typically higher than average, hence the name, High-Deductible Health Plan.

High-Deductible Health Plan (HDHP) also limit the deductible amounts and out-of-pocket expenses. For 2022, these limits are $7,050 for self-coverage only and up to $14,100 for family coverage.

Advantages of HDHPs

Many people choose these health insurance plans because they typically have lower monthly premiums due to the high deductible. Many employers offer these HDHP plans for the same reasons.

The goal of the higher deductibles is to save costs for everyone, incentivize policyholders to become smarter with their healthcare spending and give you the option of setting aside money pre-tax to pay for healthcare.

On the flip side, you need to have sufficient funds to pay your portion of the deductible. So only choose an HDHP if you have some money set aside in an emergency fund or cash savings.

Tax Advantages of Health Savings Accounts

You can set aside pre-tax income in an HSA for use specifically on health spending. HSAs are often compared to and confused with Flexible Spending Accounts (FSAs).

The two are similar in that you set aside pre-tax income for health costs, but FSAs have a serious downside that HSAs do not. With an FSA, if you do not spend the funds in your account by the end of the year, you forfeit the remaining balance to the plan administrator.

With a Health Savings Account, you never lose the funds. You could set aside money this year in an HSA and use it 40 years from now. Some people pay for their health care out of pocket, and use their HSAs to save for retirement. And as long as the funds are used for healthcare spending, you won’t pay any tax on the withdrawals.

2022 HSA Contribution Limits

How much money can you set aside for future healthcare spending with an HSA?

The maximum annual contribution is dependent upon whether you are on an individual or family plan. The 2022 maximum HSA contribution limit is $3,650 per year for an individual, while families can contribute $7,300. This is an increase of $50 and $100 for individual and family plans, respectively, over the 2020 contribution limits.

There is also a catch-up contribution limit of $1,000 for those who are age 55 or older (note: catch-up contributions for retirement accounts start at age 50).

Here is a list of contribution limits from recent years, including the HSA contribution limits from 2010 – 2022:

Tax Year	Individual	Family	Catch-Up Contributions (age 55 and over)
2022	$3,650	$7,300	$1,000
2021	$3,600	$7,200	$1,000
2020	$3,550	$7,100	$1,000
2019	$3,500	$7,000	$1,000
2018	$3,450	$6,900	$1,000
2017	$3,400	$6,750	$1,000
2016	$3,350	$6,750	$1,000
2015	$3,350	$6,650	$1,000
2014	$3,300	$6,550	$1,000
2013	$3,250	$6,450	$1,000
2012	$3,100	$6,250	$1,000
2011	$3,050	$6,150	$1,000
2010	$3,050	$6,150	$1,000

What Happens If I Contribute Too Much to an HSA?

If you are contributing funds to your HSA automatically through payroll deductions, it should be virtually impossible for you to contribute too much to your Health Savings Account.

However, it is possible to over-contribute by making deposits outside of the payroll system or through error.

If you discover you have contributed too much to your HSA, you must take action to avoid paying penalties to the IRS.

The fix is quite simple: you must remove the excess amount contributed, plus any interest earned on that amount, and pay tax on both before April 15th of the following year. (You can contribute to this year’s HSA through April 15 of next year.) You received a tax break by putting the money into your HSA pre-tax, but since you contributed too much, you technically should have paid tax on the original income.

Failure to remove the excess contribution by the April 15th deadline and withdrawing the funds at a later date will result in a 6% excise tax when you do withdraw the funds. Additionally, if you leave the funds in your account indefinitely, each year you must pay the 6% tax.

However, there is one way to get out of having to remove the contribution and paying tax: leave the contribution in, but avoid the 6% excise tax by lowering the next year’s contribution by the amount of the over-contribution.

For example, an individual with an HSA contribution limit of $3,650 per year would have been guilty of contributing $100 too much if they contributed $3,750 this year.

They could avoid paying the 6% excise tax by only contributing $3,550 next year (the $3,650 contribution limit minus $100). If they contributed the full $3,650 next year, they would then be forced to pay the 6% tax on the original $100 over-contribution.

Can You Contribute if You Aren’t Eligible for the Entire Year? Pro-Rated Contribution Rules Explained

Rarely do you start a new job on January 1st or end it on December 31st. When you gain and lose access to a high deductible health plan will impact your availability to contribute to an HSA.

If you are not active in an HDHP for the entire year, your situation is a gray area.

Here is what the IRS says in one of its instruction manuals:

The last-month rule allows eligible individuals to make a full contribution for the year even if they were not a qualified individual for the entire year. They can make the total contribution for the year if:

• They are eligible individuals on the first day of last month of their taxable year. For most people, this would be December 1, and
• They remain qualified individuals during the testing period. The testing period runs from December 1 of the current year through December 31 of the following year (for calendar taxpayers).
• If the taxpayer does not qualify to contribute the full amount for the year, the contribution is determined by using the sum of the monthly contribution limits rule.

OR

• Sum of the monthly contribution limits rule (use Limitation Chart and Worksheet in Form 8889 Instructions). This is the amount determined separately for each month based on eligibility and HDHP coverage on the first day of each month plus catch-up contributions. For this purpose, the monthly limit is 1/12 of the annual contribution limit, as calculated on the Limitation Chart and worksheet.

In other words, you can contribute the full amount if you are eligible as of Dec 1, of the calendar year. However, you may owe back taxes if you do not remain eligible from January 1 – December 31 of the following year.

You can avoid tax problems with your HSA by pro-rating contributions. Divide your contribution limit by 12 to get your monthly contribution limit.

For individuals, it is $304.16 and for families $608.33 (both numbers represent the 2022 tax year; apply the current tax year to your situation).

Each month that you had at least one day active in an HDHP counts as a full month for your contribution limit. Then multiply the number of months you were active in the health plan by your monthly contribution limit.

For example, an individual that started a new job and gained access to an HDHP on March 12th and maintained HDHP coverage through December 31st would have ten months of pro-rated contribution availability.

They could contribute $304.16 x 10 = $3,041.60 for the year. If they contributed the full amount of $3,650, they would need to take the steps listed above to avoid penalties for over-contributing to their HSA.

IRS Publication 969 has more info about HSA qualifications, contribution limits, distribution rules, and more.

Benefits of Maxing Out Your HSA Account Each Year

There are numerous advantages to having an HSA. There is the immediate tax benefit in the year you make your contribution.

And since your savings never expire, you can save the funds in your HSA or a linked investment account, and let your savings and investments grow over time. This can be a brilliant investment strategy:

Using Your HSA as a Super Retirement Account

Health Savings Accounts combine the best of the Traditional IRA and Roth IRA. Contributions are tax-deductible in the year they are made (like a Traditional IRA). The earnings and withdrawals are tax-free if used for a qualifying medical expense (like a Roth IRA, when used for retirement).

There are no age limits when using your HSA funds for a qualifying medical expense. So you can let your money ride until needed. Or just let it grow and pay your medical costs out of pocket.

What if you want to use your HSA for non-qualifying medical expenses? If used for anything other than a qualifying medical expense, you will pay taxes and a 20% early withdrawal penalty (early withdrawal penalties for retirement accounts are 10%).

However, the rules change a little bit once you turn age 65. Once you reach age 65, the current tax rules allow you to make non-qualifying withdrawals from your HSA with the same tax rules as a Traditional IRA.

So you would pay taxes on the withdrawals, but you would not pay any penalties. This flexibility makes your HSA one of the most powerful financial tools in your toolbox.

Benefits of Long-Term HSA Ownership

I maximized my HSA contributions each year I was eligible to contribute to an HSA. We decided to take advantage of the investment opportunities through the HSA, so we elected to pay our medical costs out of pocket and invest our HSA funds.

My health insurance plan has since changed, and I am no longer eligible to contribute to an HSA plan. However, I am not required to remove those funds until I decide to use them for medical expenses, or I decide I wish to withdraw the funds for other purposes.

Since the funds are invested, I’d like to let them compound as long as possible. If we have a major medical expense, I can elect to pay for them with our HSA savings.

And if we are lucky and don’t have any expenses we can’t pay out of our cash flow or savings; then I will have a large investment account I can tap into when I reach retirement age. I’m hoping for the latter!

Where to Open an HSA Investment Account

The first thing you need to do is qualify for an HSA with a compatible High Deductible Health Care Plan. Check with your employer if you have an employer-sponsored health care plan.

If not, then you may be able to purchase a qualifying HDHP on the ACA exchanges. You can also find one through a health insurance company such as eHealthInsurance (this is where I always found our health care plans after I became self-employed).

Once you have a qualifying health care plan, you can shop around for different banks or investment accounts that offer HSAs. I wrote an article about the process of opening an HSA account, which bank I chose, and why.

I decided to open my HSA account with HSA Bank, in part because they have easy access, low fees, and they make it very easy to invest your funds through a brokerage. The fees can be waived if you maintain a certain minimum in your account.

HSA Bank offers two investment options. I chose to invest with TD Ameritrade, because of their excellent reputation and access to several hundred fee-free ETFs for trading.

So I’ve never paid anything to make a stock purchase at TD Ameritrade because I invested in ETFs that didn’t have any associated trading costs.

Another place you can open an HSA is Lively.

Lively was founded on the belief that no one should have to sacrifice their physical well-being for their financial well-being. Because of this conviction, the team at Lively has created an exciting and innovative product.

Conclusion

Health Savings Accounts are one of the most flexible financial accounts you can open. If you are eligible to open an HSA, I recommend maxing out your contributions each year.

And if you can swing it, try to pay your medical expenses out of pocket. This will allow your HSA contributions to grow tax-free indefinitely, allowing you to increase your net worth.

The post 2022 Maximum HSA Contribution Limits – How Much Can You Save for Your Medical Expenses? appeared first on Cash Money Life | Personal Finance, Investing, & Career.

source https://cashmoneylife.com/hsa-contribution-limits/

2022 Traditional and Roth IRA Contribution Limits

Table of Contents

1. Traditional and Roth IRA Contribution Limits
2. Current & Historic IRA Contribution Limits
3. Best Roth IRA Companies
   1. Betterment
   2. M1 Finance
   3. Zacks Trade
   4. Other Reputable Brokerages
4. Traditional IRA Deductions and Roth IRA Eligibility Phaseouts
   1. 2022 Traditional IRA Deduction Income Limits
   2. 2022 Roth IRA Eligibility Income Limits
5. IRA Contributions Are Separate from 401k Contributions
6. Want to Save Even More for Retirement? Open an HSA
7. IRA Contribution Deadlines

One of the best ways to save for retirement is with an Individual Retirement Arrangement, or IRA.

Because of the great tax advantages, the IRS created maximum IRA contribution limits on IRAs. These caps are set by Congress and can change from time to time.

The IRS recently announced the 2022 Traditional and Roth IRA contribution limits.

Taxpayers will be again able to contribute up to $6,000 to an IRA in 2022, the same amount they were able to contribute in 2021.

However, there were some changes to the income limits for deductions for Traditional IRAs and changes to the Roth IRA income eligibility limits.

This article covers all you should need to know about 2022 IRA Contribution and Deduction Limits. Need to learn more about Roth Withdrawal Rules? We can help with that, too!

Traditional and Roth IRA Contribution Limits

The Traditional and Roth IRA contribution limits are $6,000 for those under age 50. Persons age 50 and over can make additional catch up contributions of $1,000, for a total contribution limit of $7,000.

You can have both a Roth IRA and a Traditional IRA in the same tax year, but you can’t exceed the contribution limit with your combined contributions to both accounts.

In other words, the contribution limit is per person, not per account.

Self-employed retirement plans may have different rules, so be sure to read up on the different self-employment tax plans or check with your accountant or financial advisor.

Current & Historic IRA Contribution Limits

Tax Year	Contribution Limit Age 49 & Below	Catch-up Contribution Limit Age 50 & Above	Contribution Limit Age 50 & Above
2019 - 2022	$6,000	$1,000	$7,000
2013 - 2018	$5,500	$1,000	$6,500
2008 - 2012	$5,000	$1,000	$6,000
2006 - 2007	$4,000	$1,000	$5,000
2005	$4,000	$500	$4,500
2002 - 2004	$3,000	$500	$3,500

Best Roth IRA Companies

With all the IRA contribution guidelines in mind, you may be wondering about the best places to open a Roth IRA.

Of all of the investment companies you could do business with, the following are my top three choices for opening a Roth IRA, in no particular order.

Betterment

Betterment is now the nation’s leading robo-advisor platform, and it couldn’t be simpler to use. You simply make an account, share your retirement goals and risk level, and let Betterment do the work. Rather than a living, breathing financial advisor, Betterment uses an algorithm to manage your portfolio. Since a person isn’t being paid to manage your funds, Betterment’s fees are low. If you’re new to investing or looking for a Roth IRA that requires little input from you, Betterment is an excellent bet.

Learn More about Betterment

M1 Finance

If you like a more hands on approach but hate the fees of trading, M1 Finance takes all those fees away. You can invest in more than 6,000 stocks and ETFs without any trading fees.  On top of that, you can buy fractional shares. This allows people just getting started a much greater diversity in their portfolio.

Learn More about M1 Finance

Zacks Trade

If you want to be very active trading stocks inside of your IRA then ZacksTrade is a good option. Not only do they have top tools for anlysis, their entire focus is to make trading easy for the most active trader.

Learn More about ZacksTrade

Other Reputable Brokerages

• Ally Invest
• TD Ameritrade
• Vanguard

Get your retirement savings rolling today by opening your Roth IRA with one of the companies above.

Traditional IRA Deductions and Roth IRA Eligibility Phaseouts

The IRS has specific rules regarding who can contribute to an IRA. Traditional IRAs and Roth IRAs base certain eligibility guidelines on the taxpayer’s Modified Adjusted Gross Income (MAGI), which is calculated when you file your taxes.

2022 Traditional IRA Deduction Income Limits

The IRS imposes income limits for those who are able to make a tax-deductible contribution to their Traditional IRA account. Those who earn less than a certain amount (detailed below) are able to deduct 100% of the contribution.

There is a phase-out that allows participants to deduct a lesser amount than the full contribution level. The partial deduction can still be valuable, depending on your situation. Participants who have a Modified Adjusted Gross income greater than the highest level are not able to take a deduction on their contributions.

2022 Traditional IRA Deduction Limits If Your Filing Status Is...	And Your Modified AGI Is...	Then You Can Take...
Single or Head of Household	$68,000 or less	a full deduction up to the amount of your contribution limit.
	more than $68,000 but less than $78,000	a partial deduction.
	$78,000 or more	no deduction.
Married Filing Jointly or Qualifying Widow(er)	$109,000 or less	a full deduction up to the amount of your contribution limit.
	more than $109,000 but less than $129,000	a partial deduction.
	$129,000 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.

• Single or Head of Household can deduct the full amount of their contribution their MAGI is $68,000 or less. Deduction rates phase-out beginning at a MAGI above $68,001 and end at $78,000. There is no tax deduction for those who have an income higher than $78,000.
• Married Filing Jointly can make maximum Traditional IRA contributions for an income of $109,000 or less. Traditional IRA eligibility ends at $129,000. There is no deduction for taxpayers who have an AGI of greater than $129,000.
• Married Filing Separately deductible contributions begin to phase-out with MAGI of $0, and are completely phased-out one MAGI exceeds $10,000.

2022 Roth IRA Eligibility Income Limits

Like the Traditional IRA, the IRS has phase-out rules for Roth IRA contributions. Tax filers will be able to contribute the maximum amount to their IRA if they don’t exceed certain income limits.

2022 Roth IRA Income Limits If Your Filing Status Is...	And Your Modified AGI Is...	Then You Can Contribute...
Married Filing Jointly or Qualifying Widow(er)	$204,000 or less	up to the limit
	more than $204,000 but less than $214,000	a reduced amount
	$214,000 or more	Zero.
Married Filing Separately and You Lived with Your Spouse at Any Time During the Year	less than $10,000	a reduced amount
	$10,000 or more	Zero.
Single, Head of Household, or Married Filing Separately and You Did Not Live with Your Spouse at Any Time During the Year	$129,000 or less	up to the limit
	more than $129,000 but less than $144,000	a reduced amount
	$144,000 or more	Zero.

• Married Filing Jointly can make maximum Roth IRA contributions for an income of $204,000 or less. Roth IRA eligibility ends at $214,000.
• Single or Head of Household can contribute the maximum if their MAGI is $129,000 or less. Contribution rates phase-out beginning at a MAGI above $129,001, and end at $144,000.
• Married Filing Separately contributions begin to phase-out with MAGI of $0, and are completely phased-out one MAGI exceeds $10,000.

These income limits apply to everyone, regardless of age, however, those age 50 and above can contribute an additional $1,000 per year as catch-up contributions. You only need to be age 50 or older for one day during the calendar year to be eligible for the catch-up contributions.

For specific questions, please see IRS Pub 590.

IRA Contributions Are Separate from 401k Contributions

Many investors want to know if they can contribute to both an IRA and a 401k in the same year. Yes, you can. 401k plans are an employer-sponsored retirement plan, and contributions must be made from payroll deductions. IRAs are an individual investment (hence the name Individual Retirement Arrangement).

401k plans have their own annual contribution limits, which aren’t based on income like IRA contribution limits. Like IRA limits, the IRS assesses 401k contribution limits each year and reserves the option to increase the limit.

Similar to IRAs, 401k limits are per individual, not per account. So you can’t max out a 401k plan with an employer and switch to a new plan part way through the year and max that out as well.

In addition to a 401k and IRA, it may be possible for investors to have multiple retirement accounts they participate in each year.

Want to Save Even More for Retirement? Open an HSA

Savvy investors who are looking to save even more money for retirement take their retirement investing to a new level by opening a Health Savings Account and maxing out their HSA contributions. On the surface that may not seem related to investing, but HSAs have three very powerful tax benefits.

The first is the ability to get a tax deduction in the year you make the contribution, much like a Traditional IRA. The second is that your withdrawals are tax-exempt if you make them for qualified medical expenses (bonus: there is no time limit for these withdrawals).

The final and most valuable benefit is the ability to invest the funds in your Health Savings Account, and make withdrawals once you reach retirement age.

Withdrawals during retirement are taxed as income, but you don’t pay any early withdrawal penalties. This is an advanced investment strategy and worth exploring if you are already maxing out your IRA and 401k plans, and you still have money to invest in a tax-deferred account.

Here is more information about investing in a Health Savings Account.

IRA Contribution Deadlines

You can make IRA contributions for the previous tax year up to the tax filing deadline of the current year. For example, you can make a contribution to the 2021 tax year until April 15, 2022.

If you make an IRA contribution between January 2 and the tax deadline, you should designate which tax year your contributions are for, as you can also contribute to current year IRAs during the same time frame.

Get started investing in your future today!

The post 2022 Traditional and Roth IRA Contribution Limits appeared first on Cash Money Life | Personal Finance, Investing, & Career.

source https://cashmoneylife.com/traditional-roth-ira-contribution-limits/

How Do Capital Gains Taxes Work, Exactly?

Table of Contents

1. How Capital Gains Work: Long-Term vs. Short-Term
   1. Current Long-Term Capital Gains Tax Rates
2. Tax Advantages to Holding Investments for Longer Periods
3. Using Capital Gains Rates to Your Advantage
   1. How Much Can You Save with Long-Term Capital Gains Tax Rates?
4. What About Investment Losses?
5. Tracking Capital Gains (and Losses)
   1. Specifying Which Shares to Sell
6. Special Exclusions to Capital Gains Taxes
7. Capital Gains FAQs
   1. Do I Need to Pay Estimated Taxes on Capital Gains?
   2. Will the Capital Gains Rate Remain the Same?
8. Planning Around Capital Gains Taxes is Only Part of the Picture

When you sell an investment for more than you bought it for, the government wants a cut of the gains. You are required to pay capital gains taxes on your increased earnings when you realize them. However, the amount of taxes you have to pay on the gains depends on two major factors: how long you have owned the investment, and your income.

Now for the good news. You only pay capital gains taxes on the increased value when you sell. So, if you bought an asset for $500, and it appreciates over time to $1,500, you don’t pay taxes on the $1,500 when you sell the asset. Instead, you only pay taxes on the gains — in this case $1,000.

How Capital Gains Work: Long-Term vs. Short-Term

Careful planning can give you excellent tax advantages

The rate at which you pay capital gains taxes is determined by how long you have held the asset, and your income.

If you hold the asset for a year or less, it is considered a short-term investment. You are taxed at your marginal tax rate, meaning that the gain is treated as regular income.

If, however, you hold the asset for at least one year and one day, it is considered a long-term investment. When you sell, your gains are taxed at a rate that might differ from your marginal tax rate. Sometimes this works in your favor.

Right now, taxpayers in the lowest two tax brackets don’t pay any federal capital gains taxes when they sell long-term assets.

Those who are in higher tax brackets will have to pay either 15% or 20% on their capital gains. (Capital gains taxes were previously capped at 15%).

Current Long-Term Capital Gains Tax Rates

2022 Long-Term Capital Gains Tax Rate	0%	15%	20%
Single Filers	$0 - $41,675	$41,675 - $459,750	Over $459,750
Married Filing Jointly	$0 - $83,350	$83,351 - $517,200	Over $517,200
Head of Household	$0 - $55,800	$55,801 - $488,500	Over $488,500
Married Filing Separately	$0 - $41,675	$40,401-$258,600	Over $258,600
Trusts & Estates	$0 - $2,800	$2,801 - $13,700	Over $13,700

Tax Advantages to Holding Investments for Longer Periods

As you can see, there are tax advantages to holding investments for longer periods of time. If you expect your income to increase in the future, holding long-term assets can allow you to take advantage of the lower tax rate on your gains.

Indeed, one of the reasons that many of the wealthiest pay at a lower tax rate is due to the fact that a large chunk of their incomes come from selling long-term investments. You might be in the 32% tax bracket, but if the bulk of your income comes as you sell long-held assets, you are only paying 15% on that income.

Using Capital Gains Rates to Your Advantage

Many people wait long enough for their investments to be taxed at long-term capital gains rates before selling. This allows them to realize gains, access funds, and avoid paying short term tax rates, which are the same as their marginal income tax bracket.

If you’re trying to minimize the taxes, long-term investments are the best choice.

That said, not all buy/sell decisions should be based on the tax impact. That should only be one factor to consider, not the only factor.

Short-term investments and trades can be an excellent option depending on your involvement in your portfolio and your risk preferences. Sometimes you should lock in gains when you have them, rather than risk losing them. It’s better to pay higher taxes on gains than to watch those gains melt away and sell at a loss.

Just be aware that locking in gains on a short-term trade may result in higher taxes.

If you are confused about how your investments are going to be taxed, I would suggest meeting with a financial advisor. They can walk you through the whole process and help you determine which type of investments are going to be best for you.

How Much Can You Save with Long-Term Capital Gains Tax Rates?

Let’s look at a simple example based on current tax rates. Let’s assume you are Married Filing Jointly, and your taxable income is $250,000. This is right in the middle of the 24% tax bracket.

Now let’s assume you sell some mutual funds for a gain of $10,000.

If this was a short-term capital gain, you would have to pay $2,400 in capital gains taxes.

If this was a long-term capital gain, you would have to pay only $1,500 in capital gains taxes, a savings of $900.

What About Investment Losses?

One way you can offset Capital Gains Taxes is when you lost on another investment. These are Capital Losses, if you will. Let’s see how this works in practice.

Let’s say you have $1,000 worth of stocks in two different companies, Company A and Company B.

Company A’s stock price increases by 20%, but Company B’s stock price decreases by 10%. You decide to sell both at these prices.

So your holdings are now:

Company A:

• Bought – $1,000
• Sold – $1,200
• Realized Gain – $200

Company B:

• Bought – $1,000
• Sold – $900
• Realized Loss – $100

The terms, “Realized Gain” and “Realized Loss” indicates that these are no longer paper gains or losses. Once you execute the trade, you have “Realized” the final value. As far as the IRS is concerned, this is what matters.

When it comes time to file your taxes, you subtract any Realized Losses from your Realized Gains.

Just keep in mind that all short-term transactions are lumped together and all long-term transactions are lumped together. You will pay the short-term or long-term capital gains taxes on the gains.

If you lose money, you can write-off, or deduct, up to $3,000 in losses each year against your income.

Nobody wants to lose money on an investment. But you can at least use your capital losses to offset some of the gains that would otherwise be taxed.

Note: Be sure to understand the wash-sale rule, which states you can’t deduct losses if you sell an investment at a loss, then repurchase it within 30 days. This is an important tax rule for planning purposes.

Tracking Capital Gains (and Losses)

Not too long ago, it was up to investors to report taxable events to the IRS. However, investment firms and brokerages are now required to track your cost basis (the amount of money you paid for the investment), the duration of time you held the investment, and the final sale price.

All of this is automated on the back end of their software systems. They report the final tally for your account at the end of the calendar year. The IRS logs it on their end, and the brokerage firm sends you an IRS Form 1099 to report your investment gains and losses, and whether those gains are short-term or long term (there is no distinction between short-term and long-term losses).

Most brokerages will also allow you to download a file that you can import into your tax software to help make tax filing easier. Once you upload the data, the tax software will process your short-term and long-term gains and offset any losses. Then they determine the appropriate amount of taxes you should pay based on your total tax return (all your income, deductions, credits, and other factors).

The biggest decision you have to make is when to sell to best optimize your gains and losses, and ultimately, your taxes. The rest can be handled automatically.

Specifying Which Shares to Sell

As an investor, you need to pay attention to your overall holdings. More importantly, you need to pay attention to how the cost basis is tracked for your shares.

Brokerage and investment firms will normally track your investments in one of three ways:

• FIFO – First In, First Out
• Average Cost
• Specific ID (spec ID).

FIFO – With the First In, First Out, accounting method, investment firms will always sell the first shares you acquired, regardless of the cost basis. This can be an easy way to track your accounting, but it gives you less overall flexibility in the long run.

Average Cost – The Average Cost of Shares is another simple way to track investments. In some ways, it can be good because it smooths your returns over time. However, like the FIFO method, you lose flexibility in how you handle your sales.

Specific ID – This accounting method gives you the most flexibility and allows you to “specify” which shares you want to sell. This allows you to sell some shares at long-term capital gains rates, or specify specific shares to sell at a loss if you want to offset some other gains.

Special Exclusions to Capital Gains Taxes

Realize that there are special cases when it comes to capital gains taxes. Two items to consider include:

• Home sale exclusion: If you sell your qualifying primary residence, you are exempt from paying on up to $250,000 in gains ($500,000 in gains if you’re married). This means that if your main home appreciates in value, and you have primarily lived in the property for at least two years out of the last five, you are eligible for an exemption in the need to pay taxes on the gains. Check with IRS to find out how to calculate qualifying and non-qualifying use on the home sale exclusion.
• Collectibles: Collectibles, such as coins or art, are taxed with a maximum capital gains tax rate of 28% unless you have held them for less than a year. If you have held the investments for less than a year, then you will pay your ordinary income tax rate (your marginal income tax rate). Understand that physical gold is taxed as a collectible.
• Lower income tax bracket. If you’re in the 10% or 12% tax rate bracket (which is the standard rate), then your capital gains rate is zero. If your taxable income, after deductions, is lower than $39,475 if you’re single or $78,750 if you’re filing jointly, then you’re in this tax bracket.

Capital Gains FAQs

Capital Gains taxes aren’t super-complicated. But it is a good idea to understand the ins and outs to minimize your tax obligations.

Do I Need to Pay Estimated Taxes on Capital Gains?

If you have a large taxable capital gain, you may be required to make estimated tax payments. This will depend on the amount of your capital gains, your current income, and other factors.

For additional information, consult with a tax professional, or refer to IRS Publication 505, Tax Withholding and Estimated Tax, Estimated Taxes and Am I Required to Make Estimated Tax Payments?.

Will the Capital Gains Rate Remain the Same?

The capital gains tax rate, like all tax rates, is subject to change.

Previously, capital gains tax rates were either 0% or 15%. However, recent tax law changes created three brackets – 0%, 15%, and 20%.

The ultimate long-term tax rate depends on your income.

Even the recent increase still represents tax planning opportunities based on how much of your income is derived from long-term investments. Keep this in mind when planning taxable events, such as selling stocks or other investments subject to capital gains taxes.

Planning Around Capital Gains Taxes is Only Part of the Picture

Investing is the only way to get ahead financially. That said, it doesn’t have to be overly complicated. If you’re new to investing, you might be worried about the taxes you’re going to pay. It’s simpler than you might think. In fact, most tax software programs handle capital gains taxes automatically. Don’t let the capital taxes gains scare you away from making some short-term and long-term investments.

Instead, focus on the underlying fundamentals and use the capital gains tax rates as a way to plan your purchases and sales so you can maximize your gains and minimize your tax impact.

If you need any additional advice regarding taxes, check out our full Tax Guide.

The post How Do Capital Gains Taxes Work, Exactly? appeared first on Cash Money Life | Personal Finance, Investing, & Career.

source https://cashmoneylife.com/how-capital-gains-taxes-work/

2022 Federal Tax Brackets – How to Use Marginal Tax Rates to Your Advantage

Table of Contents

1. Understanding Marginal Tax Rates
   1. What Are Tax Brackets?
   2. What Does the Marginal Tax Rate Mean?
   3. How Do I Find My Marginal Tax Rate?
2. 2022 Federal Tax Rates, Standard Deductions, & Capital Gains
   1. 2022 Federal Income Tax Brackets
   2. 2022 Standard Deductions
   3. 2022 Long-Term Capital Gains Tax Rates
3. Applying Federal Tax Rates to Your Situation
4. How to Your Calculate Effective Tax Rate
5. Using Marginal Tax Rates for Tax Planning
   1. Marginal Tax Rate Case Study
   2. Understanding Marginal Tax Brackets is Essential for Tax Planning
6. Conclusion

Marginal tax brackets are a frequently misunderstood topic. It’s not uncommon for someone to say they don’t want to get a raise because it will put them in a higher tax bracket and force them to pay more taxes on all the money they earn. They believe they would be better off not receiving the raise in the first place. This is a common misconception, but thankfully, that is not how marginal tax rates work.

For example, let’s say you receive a salary increase that takes your final salary from the 12% tax bracket to the 22% tax bracket. Your raise doesn’t place all of your income to the 22% tax bracket. You only pay the higher taxes on the amount that falls within the 22% tax bracket.

We’ll show you the income levels for each tax bracket and show some examples of income tax brackets and how marginal taxes actually work. You can use these to calculate your effective tax bracket or the amount of taxes you are actually paying on all of your income.

Understanding Marginal Tax Rates

Tax planning is one of the most fundamental aspects of financial planning. In fact, many people would argue that financial planning without respect to taxes is not really financial planning. Yet, in order to fully understand how tax planning works, it’s important to understand what your marginal tax rate is.

This “gradual” tax schedule is called a marginal tax rate system. In effect, the amount of taxes you pay increases as your income increases. The IRS places the marginal tax rates into brackets, making the marginal tax formula easier to understand and compute by hand.

Let’s look at the 2022 Federal Tax Brackets to see this in action.

What Are Tax Brackets?

Before we can discuss marginal tax rates, it’s important to understand how income tax brackets work. For federal tax purposes (and most states that do not have a flat income tax), income tax brackets state the amount of tax that is paid for income earned within that bracket.

For example, in 2022, a married couple (filing jointly) making under $20,550 is taxed at 10% of their income. Thus, they’re in the 10% tax bracket.

Once they make over $20,500, they are taxed at 12% of the income above $20,550. Now, they’re in the 12% tax bracket and will be until they earn over $83,550. Then, they’ll move up to the 22% tax bracket, where they’ll pay 22% on the income above $83,550, and so on.

Once you determine what income tax bracket you’re in, then your marginal tax rate is simply the applicable tax on your next dollar of earned income. For example, if you’re in the 22% tax bracket, then your marginal tax rate is 22%. For every additional dollar you earn, you’ll pay an additional 22 cents in tax. Conversely, for each dollar of decreased taxable income, you’ll save 22 cents in tax. It’s this understanding that helps define a sound tax planning approach.

What Does the Marginal Tax Rate Mean?

Now that we know what the marginal tax rate is, we can think about how it applies in tax planning. Simply put, every decision that has a tax impact can now be evaluated to determine the tax savings, and the after-tax financial impact. Decisions that might be very tax-wise in one tax bracket (such as accelerating or postponing taxable income) might not be prudent in another.

For example, let’s assume that you just bought a stock six months ago. Since then, a series of developments and bad earnings reports have convinced you to sell.

Now, you’re trying to decide whether to sell the stock at the end of the year or at the beginning of next year. If you’re in the 12% tax bracket, but expect to be in a higher tax bracket next year, you might want to sell now. If you’re in the 32% tax bracket, but expect to be in a lower bracket next year, you might want to wait.

This is a basic example of how marginal tax brackets affect tax planning. We’ll look at another example in more depth. First, let’s discuss how you can find your marginal tax rate.

How Do I Find My Marginal Tax Rate?

To find your previous year’s marginal tax rate, you only need your tax return (Form 1040 for most people). Depending on the type of return, you’ll use the line that correlates to taxable income:

• Form 1040: Line 43
• Form 1040A: Line 27
• Form 1040EZ: Line 6

Once you determine your taxable income, you can refer to the IRS tax tables to figure your marginal tax bracket. Keep in mind your filing status (single, married filing jointly, married filing separately, or head of household), particularly if your status has changed. Since the IRS tax tables are updated as part of a revenue procedure that contains a lot of other annual updates, they can be cumbersome. You may find a plethora of websites, such as taxfoundation.org that make this information easier to digest.

2022 Federal Tax Rates, Standard Deductions, & Capital Gains

Here are the current tax rates. You can use this information to help plan your tax bill this year, as well as for long-term tax planning, such as doing a Roth IRA conversion, selling stocks for short-term or long-term capital gains, making charitable donations, and other moves that will impact your tax return.

2022 Federal Income Tax Brackets

2022 Marginal Tax Rate	Single Individuals Taxable Income Above	Married Filing Jointly or Qualified Widow(er) Taxable Income Above	Head of Household Taxable Income Above	Married Filing Separately
10%	$0	$0	$0	$0
12%	10,275	$20,550	$14,650	10,275
22%	$41,775	$83,550	$55,900	$41,775
24%	$89,075	$178,150	$89,050	$89,075
32%	$170,050	$340,100	$170,050	$170,050
35%	$215,950	$431,900	$215,950	$215,950
37%	$539,900	$647,850	$539,900	$323,925

2022 Standard Deductions

The Standard Deduction is an amount taxpayers can deduct from their income before paying income tax. You can choose to apply the Standard Deduction or itemize deductions, whichever results in the best tax return for your situation.

The Tax Cuts and Jobs Act substantially increased the Standard Deduction, removed personal exemptions, and decreased the amount taxpayers could deduct for SALT taxes (State and Local taxes, including state and property taxes). These tax changes make it less viable for many people to claim deductions.

Here are the current Standard Deductions:

Filing Status	Standard Deduction Tax Year - 2021	Standard Deduction Tax Year - 2022
Single	$12,550	$12,950
Married Filing Separately	$12,550	$12,950
Married Filing Jointly	$25,100	$25,900
Head of Household	$18,800	$19,400

It only makes sense to itemize tax deductions if they will be larger than the Standard Deduction.

2022 Long-Term Capital Gains Tax Rates

Capital gains taxes are assessed when you sell certain property or investments for a profit. Short-term gains are for investments you held for less than a year. These are assessed as regular income and are taxed at your marginal income tax bracket.

Long-term capital gains are for investments that were held for longer than a year. They are taxed at the following schedule:

2022 Long-Term Capital Gains Tax Rate	0%	15%	20%
Single Filers	$0 - $41,675	$41,675 - $459,750	Over $459,750
Married Filing Jointly	$0 - $83,350	$83,351 - $517,200	Over $517,200
Head of Household	$0 - $55,800	$55,801 - $488,500	Over $488,500
Married Filing Separately	$0 - $41,675	$40,401-$258,600	Over $258,600
Trusts & Estates	$0 - $2,800	$2,801 - $13,700	Over $13,700

Some investments, such as gold or collectibles, are not taxed by the capital gains guidelines.

Applying Federal Tax Rates to Your Situation

As you can see from the above federal tax bracket table, there are tax brackets for income ranges. For example, a married couple will pay the following taxes:

• 10% federal income tax on the first $20,550 of income;
• 12% federal income tax on income from $20,551 – $83,550;
• 22% federal income tax on income from $83,551 – $178,150;
• and so on.

As mentioned above, this is a gradual tax system. This does not mean that you will pay the corresponding income tax rate if you break the threshold by $1.

For example, receiving a raise from $83,550 to $83,551 will not subject all of your income to the 22% tax bracket – it will only apply to income earned within that specific tax bracket. These gradual tax rates add up to your effective tax rate.

How to Your Calculate Effective Tax Rate

Let’s use an example of a married couple filing jointly with $100,000 of taxable income (after deductions, exemptions, etc.). They are in the 22% tax bracket but don’t actually pay $22,000 in federal taxes. They would pay:

• 10% on first $20,550 of income ($2,055.00)
• 12% on income from $20,551 – $83,550 ($7,560.00)
• 22% on income from $83,551 – $178,150 ($3,619.00)
• for a total of $13,234.00

In this example, the weighted, or effective tax bracket, is 13.234%.

Note: this is a very simplified example, and does not include any deductions. This example also only takes federal taxes into account and does not include state or local taxes. You should be able to find a state tax calculator to assist your calculations.

Note: this is a very simplified example, and does not include any deductions. This example also only takes federal taxes into account and does not include state or local taxes. You should be able to find a state tax calculator to assist your calculations.

This is easy to figure out when you file your taxes, and most tax software programs, including TurboTax and H&R Block (H&R Block Online Review), can give you these calculations when you use their program.

Using Marginal Tax Rates for Tax Planning

Using your knowledge of the marginal tax rate system, you can use them to help reduce your taxes if you are near one of the tax bracket limits. All you need to do is bring your final number below the tax bracket.

For example, if you are married filing jointly and earn $85,550, you can contribute $2,000 to your 401k and avoid paying the higher tax rate on $2,000.

The marginal tax bracket on the amount over $83,550 would be 22%. By dropping back down to the 12% tax bracket, you can save 10% on the taxes paid for that $2,000. So your 401k contributions in this situation would save you $200 in taxes.

Again, this is a simplified example.

However, you can see that the tax savings can easily add up to a couple of hundred dollars to several thousand, depending on how much you can shave from your marginal tax rate.

Marginal Tax Rate Case Study

Let’s consider a young couple that is looking into converting their traditional IRA to a Roth IRA. To summarize, a Roth conversion is simply transferring funds from a traditional or non-deductible account to a Roth account. The benefit is that you do not pay taxes on earnings in a Roth account.

However, you have to pay taxes on any traditional IRA funds that you convert. It makes sense to do this if you expect to be in a higher tax bracket in your retirement years when you are drawing from your IRA.

Joe & Jane have a traditional IRA account valued at $50,000. They’ve been saving diligently since they got married 5 years ago. They feel like they’re doing pretty well, especially since they’re only 30. At some point, they heard that a Roth IRA would be better suited for their financial goals, especially if they can convert at a relatively low tax rate. In order to do so, they have to pay ordinary taxes on the converted amount.

Let’s calculate their tax bracket. Since Joe is an O-3 in the Air Force, and has been in for 8 years, their monthly income is $6,241.57. Assuming they have no other taxable income, this puts their 2022 annual taxable income at $74,899.00 (rounded up to the nearest dollar). Exemptions and deductions notwithstanding, this puts them squarely in the 12% tax bracket. This is their marginal tax rate.

Let’s assume that Joe & Jane want to convert as much as they can, but stay within their current tax bracket. A quick look at the tax tables shows that they’ll remain in the 12% bracket until their income reaches $83,550. In other words, they could convert $8,651 this year at 12%. After that, they would pay 22% for the amount above $8,651.

Without going into detail about what Joe & Jane SHOULD do, let’s talk about what they COULD do:

• They could convert the entire amount this year. They would pay a total of $10,134.90. This includes $1,038.12 for converting $8,651 at the 12% rate plus $9,096.78 for converting the remaining amount at the 22% rate.
• They could convert up to the 12% limit without going over. In doing so, they would pay $1,038.12 this year. They could always revisit this in future years to take advantage of their 12% tax bracket. Assuming they could fully convert at the 12% bracket, they would pay a total of $6,000. This would save them over $4,130 compared to converting their entire IRA at one time…with no substantial impact to their portfolio! Remember, we’re not talking about changing investments, we’re only talking about changing asset location from a tax-deferred to a Roth account.
• They could choose not to convert at this time. They could make this decision based upon any number of reasons. Perhaps they find a better opportunity. Maybe the tax rules change. Perhaps there’s an upcoming deployment that allows them to convert some of their money at the 10% bracket.

Assumptions:

Again, we’re looking at rough assumptions to show how tax brackets work, and factors to consider for tax planning purposes. In the above case study, we are assuming there are no additional deductions that reduce taxable income. Contributing to a Traditional IRA, the Thrift Savings Plan (similar to a government 401k), or itemizing deductions can reduce the taxable, which means the individual may be able to convert more money within the 12% tax bracket.

Understanding Marginal Tax Brackets is Essential for Tax Planning

That’s an example of how understanding your marginal tax bracket influences your tax planning. It’s important to highlight that tax should be a consideration, but not the only consideration. Bad investments do not become sound ones because they’re tax-efficient. Bad purchases (such as buying more of a house than you need or can afford) do not become good ones just because there’s a tax benefit.

However, tax efficiency can make a good investment even more compelling, or it could make an otherwise ho-hum investment a better one. More importantly, it can help you think in more than one dimension. Instead of focusing on ‘either-or,’ tax-planning also should include ‘when?’

In Joe & Jane’s example, you can understand their approach if they decide to stretch out their Roth conversions over a 10-15 year period. Since they’re only 30, there is zero impact on their ability to use the money in retirement. However, that extra $4,400 could grow into much more over time. Of course, this could not happen if Joe & Jane didn’t take the time to understand their marginal tax rate or what tax bracket they’re in. Without understanding your marginal tax bracket, tax planning cannot take place.

Conclusion

There can be many opportunities to incorporate tax planning into your financial planning. Understanding your marginal tax bracket is the first step in being able to determine what tax planning decisions are best for your situation. While this article is not a substitute for tax advice, I hope it helps set an educational foundation for future planning efforts. Check out our tax guide if you anymore questions or need help.

The post 2022 Federal Tax Brackets – How to Use Marginal Tax Rates to Your Advantage appeared first on Cash Money Life | Personal Finance, Investing, & Career.

source https://cashmoneylife.com/marginal-tax-rates/

2022 401k Plan Contribution Limits – Maximum You Can Contribute

Table of Contents

1. How Much Can I Contribute to my 401k in 2022?
2. Maximum 401k Contribution Limits – 2007 – 2022
3. These Contribution Limits Apply to 401k, 403b, 457, 401a Plans, and Thrift Savings Plan
4. Maximize Your 401(k) Contributions if You Are Able
   1. Maximize Your 401k Through Fixed Contributions
   2. Maximize Your 401k with Percentage Based Contributions
   3. What About Contributing Too Much to Your 401k?
5. IRA or 401k? – Which is Better for Retirement Planning?
   1. Where Should You Invest First – IRA or 401(k)?
   2. Why Contribute to an IRA?
6. Managing Your 401k with Your Other Investments
   1. Tools to Help Manage Your 401k Plan

Update: The IRS just announced the 2020 401(k) contribution limits: The employee elective deferral limit increased to $20,500, and the catchup contributions remain $6,500 for those ages 50 and up.

Investing in your 401k plan or other retirement account is one of the easiest and best ways to prepare for retirement. These accounts offer an incredibly valuable tax advantage for investors. But there are limitations to these plans. Each year the IRS evaluates and releases updated 401k Plan Contribution Limits. This limit is the maximum you can contribute based on your age.

While the IRS won’t increase contribution limits every year, they also won’t decrease the contribution limits either. At worst, contribution limits will remain stagnant.

How Much Can I Contribute to my 401k in 2022?

The maximum employee deferral for 2022 is $20,500 per person. The employee deferral is the amount the employee can contribute to their 401k plan from their paycheck.

There is also a maximum Catch-up Contribution of $6,500, which is only available to participants age 50 and over. This is the same amount as it has been since 2020, when it was increased $500 over the previous limit of $6,000, which had been in place since 2015.

2022 saw a $1,000 increase for the maximum employee deferral over the 2021 tax year. (See the chart below for historical 401k contribution limits).

There was also a $3,000 increase to the Total Contribution Limit for 2022, which now comes to $61,000. The max deferred compensation includes employee contributions, matching contributions, bonuses, and other deferred compensation. (If you are over age 50, you can also add your catch-up contributions to this number, bringing the max total deferred contribution limit to $67,500 for 2022).

Let’s take a look at all of these numbers in more detail and discuss what they mean for investors.

Maximum 401k Contribution Limits – 2007 – 2022

How to read this chart: The following chart lists the maximum 401k plan contribution limits, along with the contribution limits from previous years.

The number under the heading “Employee Contributions” applies to persons under age 50. “Catch-up Contributions” apply to people aged 50 and over.

The column labeled “Total Contribution Limit” is the maximum you can apply to your 401k plan in any given year if you are under age 50. This includes all possible contributions, including employee contributions, employer contributions, profit-sharing, or any other allowable contributions.

The final column is the total contribution limit from all sources for those who are age 50 or older.

Year	Employee Contributions	Catch-Up Contributions (Age 50+)	Total Contribution Limit	Total Contribution Limit w/ Catch-Up
2022	$20,500	$6,500	$61,000	$67,600
2021	$19,500	$6,500	$58,000	$64,500
2020	$19,500	$6,500	$57,000	$63,500
2019	$19,000	$6,000	$56,000	$62,000
2018	$18,500	$6,000	$55,000	$61,000
2017	$18,000	$6,000	$54,000	$60,000
2015-2016	$18,000	$6,000	$53,000	$59,000
2014	$17,500	$5,500	$52,000	$57,500
2013	$17,500	$5,500	$51,000	$56,500
2012	$17,000	$5,500	$50,000	$55,500
2009-2011	$16,500	$5,500	$49,000	$54,500
2007-2008	$15,500	$5,000	$46,000	$51,000

These Contribution Limits Apply to 401k, 403b, 457, 401a Plans, and Thrift Savings Plan

These contribution limits apply to more than just the 401(k) plan – they actually apply to several different retirement plans that are written into the tax code. These limits also apply to Individual 401k Plans (also called the Solo 401k; this is a small business retirement plan).

It is worth looking into your specific plan as there may be slight differences you should be aware of, particularly when it comes to employer contribution rules, profit sharing, or other plan specific topics.

TheMilitaryWallet.com covers Thrift Savings Plan contribution limits to discuss some of these examples as they apply to the Thrift Savings Plan, which is similar to a 401(k) plan but is only available to military members and certain government employees.

These contribution limits also apply to the Roth and Traditional versions of the 401(k) plan and similar employer-sponsored retirement plans.

Maximize Your 401(k) Contributions if You Are Able

If you are able to maximize your 401(k) contributions, you should be well on your way to setting yourself up for a solid retirement fund. There are two easy ways to determine how much to contribute to maximize your 401(k) account this year.

Maximize Your 401k Through Fixed Contributions

If your company allows contributions of a flat dollar amount per month or per check, then simply contribute that amount from your paycheck. If you are under age 50, then you would be able to contribute up to $1,708.33 per month, or $854.16 each check if you are paid twice each month.

If you are age 50 or over, you can contribute up to $2,250 per month, or $1,125 per check if you are paid twice per month.

Remember, those are the numbers to max out your contributions. You can contribute less than that amount if that is what works with your budget.

Maximize Your 401k with Percentage Based Contributions

If your company doesn’t allow you to make a flat-rate contribution, then you will need to do a little math. To do this, divide the maximum you can contribute (either $19,500 or $26,000) by your total salary. The percentage you see is how much you should contribute every paycheck.

For example, if you earn $100,000 per year and you can contribute up to $20,500 to your 401k, you need to contribute 20.5% of your salary ($20,500 / $100,000 = 20.5%).

If you cannot afford to contribute up to the maximum, then try to at least contribute up to your employer match if your employer makes matching contributions.

The employer match is part of your compensation package and is essentially free money. Not contributing up to this amount is like leaving free money on the table!

You should be able to change your 401k contribution amount, your tax withholding, and other similar actions through your Human Resources Department.

What About Contributing Too Much to Your 401k?

There are annual contribution limits, so you will want to avoid contributing too much. The IRS will likely penalize you if you aren’t able to correct the problem by the end of the calendar year. Thankfully, many HR offices and 401k plans have systems in place that will either prevent over-contributions or will automatically refund the overage.

However, those systems, by default, can only work if you remain employed by the same company for the entire year. You will want to pay special attention to the annual 401k contribution limitations if you change jobs during the year.

If you do happen to contribute too much, I strongly recommend working with your HR department or 401k plan administrator as soon as you notice the issue. You may also want to consult with a tax professional to help you understand if there will be any long-term ramifications or if you will owe any additional taxes or penalties.

IRA or 401k? – Which is Better for Retirement Planning?

Most employees who have access to a 401k plan may also have the opportunity to contribute to another type of retirement plan, the Individual Retirement Arrangement, or IRA.

Where Should You Invest First – IRA or 401(k)?

Another consideration when contributing to your 401(k) plan is whether or not you should contribute to it at the expense of contributing to a Roth or Traditional IRA. I covered this topic in a previous article – where should you invest first – IRA or 401(k)?

In general, it is best to contribute enough to maximize any employer contributions you may be eligible for, then try to max out a Roth IRA if you are eligible to contribute to one.

This ensures you are taking advantage of the free money through your employer’s matching contributions. It also gives you the best of both worlds when it comes to current and future taxes. Tax flexibility is an important retirement planning tool.

If your company doesn’t offer 401k matching contributions, then you may consider contributing to a Roth IRA first, then contributing to your 401k if you are able to do so.

Why Contribute to an IRA?

Why Contribute to an IRA?: For the most part, IRAs have similar tax rules as 401k plans, but with different contribution limits.

While IRAs have similar tax benefits to 401k plans, they do have a few important benefits – namely, they are more flexible, as you control how and where your investments are made. This allows you more freedom and control over investment types, and more importantly, investment costs (this article covers what to do if your 401k plan has poor investment options).

Roth IRAs also don’t have Required Minimum Distributions (RMDs), which exist in all 401k plans, including the Roth 401k.

If you can afford to maximize both investments, then go for it! If you can maximize both an IRA and a 401k, then you should read this article to help decide how to invest after maxing out your retirement accounts. You may still have options, such as investing through an HSA, a taxable investment account, peer to peer loans, real estate, and more.

Managing Your 401k with Your Other Investments

Many people chose to manage their own investments. This could include managing the investments within their 401k plan, as well as any outside investments, such as an IRA, taxable investment account, etc.

If this describes you, and you are confident in your ability to manage your investments, then go for it! This is what I do, and I’m comfortable managing my investments.

Tools to Help Manage Your 401k Plan

There are tools out there that help employees get the most out of their defined-contribution plans (e.g. 401(k), 401(a), 403(b), 457, and the Thrift Savings Plan).

I do manage my own investments, but I do so using a free online tool from Personal Capital. This free tool gives me a better understanding of how all of my investments work together. You can learn more in our Personal Capital Review, or you can visit their site for more information.

Another online tool to help manage your 401k plan is Blooom. Blooom helps investors by overseeing the account and analyzing investing opportunities that investors may not be aware of.

Blooom can help investors analyze their investment fees, improve their diversification, and find the right mix of stocks, bonds, and other investments.

If this interests you, head over to Blooom’s secure website to learn more.

Whichever retirement plan you choose, you are doing the right thing by saving and investing for your retirement.

Visit the IRS website for more details regarding 401k plans and other retirement plans.

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