A voicemail caller named Jamie says, “I have a mandatory Social Security alternative plan at work where I save about 7 percent. But my goal is to save a total of 15 percent for retirement. Does that mean I should save 15 percent on top of what I’m putting into my existing plan?
Also, I can choose a 457(b) or a 403(b), which both come with a Roth option. Can you explain which type of retirement account would be more beneficial?”
Thanks for your question, Jamie! In this post, I’ll explain what a Social Security alternative plan is, who qualifies for one, and the differences between a 457(b) and a 403(b).
What Is a FICA Alternative Plan?
A Social Security Alternative Plan is more commonly called a FICA Alternative Plan or a FICA Replacement Plan. It’s a private retirement account created for certain workers who are temporary, part-time, or employed by the government and are not eligible to pay into the Social Security system.
Other employees are required to fund the Social Security system by paying FICA payroll taxes, which I’ll explain in a moment. Employers must deduct these taxes from your paychecks and send them to the government on your behalf.
So, think of a FICA plan as a substitute when you don’t pay Social Security taxes. Instead, you’re required to contribute a minimum of 7.5 percent of your wages to a FICA plan account.
Think of a FICA plan as a substitute when you don’t pay Social Security taxes. Instead, you’re required to contribute a minimum of 7.5 percent of your wages to a FICA plan account.
Contributions to a FICA Alternative Plan can come from an employee, employer, or both. It sounds like Jamie is putting in the entire 7.5 percent on her own, which is the most common scenario.
No matter who funds a FICA alternative plan, the employee owns it and controls how the funds are invested. If you leave your employer or move to a position that makes you ineligible for a FICA alternative plan, you can always take the money with you.
Since Jamie’s goal is to save fifteen percent for retirement, one option that her FICA plan may allow is to raise her contribution from 7.5 percent to fifteen percent. Another option is to also contribute 7.5 percent of her income to another retirement account, such as a Roth IRA.
What Is FICA?
Let’s back up for a brief explainer of FICA. FICA stands for the Federal Insurance Contributions Act. This law mandates the Social Security and Medicare taxes that are deducted from many workers’ wages.
Most employees fund these programs by paying FICA tax of 7.65 percent up to a certain amount of earned income. What many people don’t realize is...
Five key rules for using a Roth account at work or on your own
Debra H. says, “I really enjoy learning about retirement topics on your podcasts. Would you please explain how the 5-year rule applies to transferring a Roth 401(k) to a Roth IRA in an upcoming podcast? Thanks for the valuable information you provide.”
David R. is also interested in learning more about Roth accounts. He says, “My employer offers a Roth 401(k) option, but I don’t think I qualify due to my income. I like the idea of paying tax for my contributions now. Can you explain if there’s a way for me to participate?”
Thanks for your questions, Debra and David! Roth accounts have nice benefits that cut taxes. But like anything governed by the IRS (Internal Revenue Service), they have a sea of rules, which can be confusing to navigate.
What Is a Roth Retirement Account?
Most retirement plans—such as a traditional IRA, a 401(k), and a SEP-IRA—allow owners to make tax-deductible contributions if you meet certain requirements.
For instance, if you earn $60,000 and contribute $5,000 to a workplace 401(k), you pay income tax on $55,0000 not on $60,000. However, when you retire and take withdrawals of contributions and earnings, Uncle Sam catches up with you by imposing income tax on any distributions.
Contributions to any type of Roth are taxed in the year you make them. However, your account earnings and all future withdrawals are completely tax-free if you meet certain rules.
But Roth accounts—such as a Roth IRA, a Roth 401(k), or a Roth Solo 401(k)—have the opposite taxation. Contributions to any type of Roth are taxed in the year you make them. However, your account earnings and all future withdrawals are completely tax-free if you meet certain rules, which we’ll cover.
If you invest for decades and your Roth account mushrooms in value, it’s really nice to know that you’ll never have to pay income tax on those earnings. And if income tax rates increase down the road, that could make having a Roth especially sweet.
Now, let's look at some things you need to know about Roth retirement accounts.
5 Things You Should Know About Roth Retirement Accounts 1. You can withdraw original Roth contributions without penalty.
Besides tax-free income in retirement, one of the best parts about having a Roth...
Congratulations to all the new graduates! No more cramming for exams, living in cramped quarters, or eating bad cafeteria food. You’ve got a lot to look forward to. But you might also be feeling a little stressed about your future and finances, especially when it comes to how you manage money.
How you handle money over the next few years is incredibly important. If you learn some fundamental rules of personal finance now, applying them will set you up for a lifetime of financial success.
Here are six tips to help new graduates (or anyone who wants money advice) manage money.
6 Tips for College Grads to Manage Money Like a Grownup
Set up the best bank accounts.
Build your emergency fund.
Understand your student loans.
Know how to build great credit.
Avoid dangerous debts.
Start investing sooner rather than later.
Let's take a look at how each tip that can help anyone get a leg up on their financial future.
1. Have the best bank accounts.
One of the first things you should do after graduating is make sure you have great checking and savings accounts. The accounts that you had while in school might not be the best ones to keep.
Bank accounts lay a foundation for your money management system, so they need to give you lots of benefits. Look for a bank or credit union that offers
A great mobile app
No monthly fees
Free bill pay, and
Visit Bankrate to compare the best FDIC-insured accounts available for your location or nationwide. I’m a huge fan of USAA, which operates only online, offers military benefits, and has a best-in-class mobile app. Shop around to see what makes sense for your lifestyle and financial situation.
2. Build your emergency fund.
Learning how to handle money wisely can be challenging for new graduates. My best advice for starting off on the right financial foot is to begin building an emergency fund with your very first paycheck.
If you can set aside small amounts over time, such as $100 a month, you’ll have more than $1,000 in a year. You’ll be prepared for unexpected expenses, such as car repairs, last-minute travel, or medical bills that aren’t covered by insurance.
I’ve written about the Roth IRA many times before, with good reason. Hands down, it’s one of the best places to invest for the long-term because it’s one of the only accounts that gives you tax-free money in retirement. But what you may not know is that unlike other types of retirement accounts, you can spend it before retirement without having to pay taxes or an early withdrawal penalty.
Owning a Roth IRA and really understanding all the rules, is another matter. So, in this post, I’ll explain the unique flexibility of these accounts and 4 ways you’re allowed to make penalty-free withdrawals from a Roth IRA to spend before you retire.
In How to Make Kids Rich by Investing in an IRA, I discussed the eligibility rules and benefits of using a Roth IRA to give minors a financial head start in life. A Roth IRA is available to anyone, no matter your age, who has earned income up to certain annual limits (see the article about making kids rich for more details).
With a Roth IRA, your contributions are not tax-deductible, which means you make them on an after-tax basis. Then your investment earnings grow completely tax free—that’s a huge benefit!
Because you pay tax upfront on Roth contributions, you’re allowed to withdraw them at any time for any reason. You don’t owe the IRS additional tax or penalties on that portion of your account. That means you can take out an amount that equals, but doesn’t exceed, the total amount of your original contributions, with no problems.
Because you pay tax upfront on Roth contributions, you’re allowed to withdraw them at any time for any reason.
However, where things get a little confusing is for the earnings portion of your Roth account. The investment growth that your contributions creates is subject to tax in certain situations. There are restrictions on withdrawals of earnings because you haven’t paid tax on them yet.
Also, the IRS says earnings must be distributed from a Roth IRA last. So, how much you want to...
If you want to create wealth, investing is one of the best ways to make it happen, besides winning the lottery or inheriting a fortune, of course. No matter if you’re saving for a luxury retirement, ivy league education expenses, or to pass money to the next generation, investing consistently over time is a wise strategy.
Problem is, investing can be intimidating, and no one wants to lose money, right? Many people never get started, or they have big misconceptions about what good investing really is.
I interviewed Chris Hill from The Motley Fool to chat about common mistakes that new and seasoned investors should avoid. If you haven’t already heard of The Motley Fool, it’s a multimedia financial services company that’s been providing advice for investors since 1993. Chris oversees business strategies and a lot of audio programming at The Motley Fool. He’s the terrific host and friendly voice behind two wildly popular podcasts: Motley Fool Money and MarketFoolery.
Motley Fool Money airs every week on more than 50 radio stations across the United States. It is consistently ranked as a top business and investing show on Apple Podcasts and other podcast sites. Chris interviewed me for the February 28, 2019 episode of the MarketFoolery podcast, which is another top-ranked daily show.
On the Money Girl podcast, Chris and I discuss his background, answers to common questions from his audience, and a variety of investing topics, including:
Overcoming barriers to getting started with investing and why it’s easier than you may think
The best account to begin investing with and how to make it automatic
The only investment fund you may ever need
Big misconceptions about investing that you should avoid
How your temperament plays a role in investing success
Why holding too much cash can be dangerous in the long run
The Tax Cuts and Jobs Act of 2017 made sweeping changes, including reductions to tax rates for most individual tax brackets and limits on many tax breaks. Problem is, employers may not calculate federal withholding changes properly or have updated W-4 forms from workers. This can leave many taxpayers owing more than they expected.
Sometimes, the amount owed is relatively small and painless to pay. But when you have a large tax debt, it can seem impossible to pay without a special arrangement in place.
Use one of the following six options to deal with an income tax debt that you can't pay:
Option #1: Offer in Compromise
With an offer in compromise (OIC) your tax debt is reduced based on your income, necessary expenses, assets, and equity in assets. To qualify, you can't have any delinquent taxes, estimated tax payments, or be in bankruptcy.
Option #2: Partial Payment Plan
If the IRS won’t budge on the tax amount you owe, they may give you an installment agreement, which allows you to make partial payments on a set schedule. This arrangement lets you gradually eliminate your tax debt.
Option #3: File an Amended Tax Return
If your tax debt results from an overstatement of your financial liability on a tax return from the past three years, you can correct it by filing an amended return.
Also, filing tax returns for years that you didn't file could reduce your tax liability. You might discover that you owe zero or should receive a refund.
Option #4: Non-Collectible Status
If you have a financial hardship and your expenses exceed your income, you may qualify for non-collectible status. This doesn’t reduce the amount you owe but gives you more time to pay. So, it's a good option when you know that you'll have the ability to pay your debt in...
Behavioral finance is the study of how psychology affects the way you handle money. It allows for the fact that we don’t always act rationally. Our emotions and biases strongly influence what we do and don’t do with our personal finances.
Sheri reminds us that success comes from having the right habits, attitude, and mindset. We chat about some driving forces behind decisions that are critical for building wealth and living the life you dream of, including:
Sometimes the only thing preventing you from improving your personal finances is having the time and motivation to finally get started. Maybe you’ve heard about an easy way to save money or know that you need to review your retirement savings, but you’ve just been too busy to follow through.
A 5-Day Plan to Improve Your Financial Life
Day #1: Set your financial intention.
Day #2: Create a spending plan.
Day #3: Automate your retirement savings.
Day #4: Review your credit reports.
Day #5: Shop your services.
Here’s more detail on a 5-day plan to improve your financial life.
Day #1: Set your financial intention.
Set financial intentions or goals that will inspire you to work hard and make necessary spending sacrifices.
If you’re not sure what your goals should be, block out an hour by yourself or with your partner to create them. Start by considering the answers to these questions:
What do I want my financial life to be like in five or ten years?
What about my (or our) finances worries me?
How can I build financial safety nets to eliminate stress?
What you want to achieve with your money should be customized to your situation—but here are a few examples:
Save for a home down payment, vacation, or holiday gift fund.
Day #2: Create a spending plan.
Start by looking at your expenses over the past few months and see where you can cut back. Maybe you can shrink a large expense, such as your housing. For example, downsizing your apartment or renting out a room in your home could save money.
Or you might be able to eliminate several smaller expenses, like cable TV, dining out, or a gym membership. By creating a simple spending plan, you can begin to take control of your finances.
Day #3: Automate your retirement savings.
Participating in a retirement plan at work, such as a 401(k) or 403(b), is a great way to make sure you’re consistently saving for retirement. But if you don’t have workplace benefits or if you...
Spring is an often-busy time for home buyers and sellers who want to make deals and moves when it’s warm outside and the school year is coming to a close. But selling a primary home or an investment property comes loaded with tax consequences.
I interviewed Collier Swecker about key tax considerations home sellers should know to pay less. He’s a founding partner of the Mega Agent real estate team at RE/MAX Advantage, recognized as RE/MAX's #1 selling team in the Birmingham, Alabama market.
Collier is a distinguished HomeLight agent, awarded for ranking in the top 1% of all agents in his area. He leads one of the most technologically advanced and forward-thinking real estate teams in Alabama.
But on top of all those accolades, Collier graduated from Auburn University with a law degree and Washington University School of Law in St. Louis with a Master of Law in Taxation. He was the principal partner in Swecker and Sparks, a law practice in Auburn, Alabama, for three years. He left the practice in 2006 to pursue a new career in real estate development and sales.
Click on the audio player above to listen to the interview. Here are some of the real estate and tax topics we cover:
Common costly mistakes first-time home sellers make.
How to avoid up to $500,000 in capital gains tax on a home sale.
What to consider when selling an investment or rental property.
Home records you should keep in order to pay less tax.
Why paying for title insurance on a home sale is critical.
Tips for choosing the best real estate pro to sell your property.
Differences between selling a single-family home vs. a condo or townhouse.
Travel insurance is often overlooked. Most of us consider it an unnecessary expense. But when you understand the big benefits you get for a relatively low cost, you might never skip buying a policy again.
A travel policy covers you for a variety of situations that range from an inconvenience, such as losing your luggage, to bumping-up against a hurricane, or having a life-threatening medical emergency that requires an airlift to the nearest hospital.
Don’t forget that most health insurance plans, including Medicare, offer little to no coverage when you’re outside of the U.S. So, check your plan, or speak to an insurance representative to make sure you understand what costs you’d be responsible for outside of the country.
To go deeper into the world of travel insurance, I interviewed Stan Sandberg, co-founder of TravelInsurance.com. He helps explain what travel insurance is and why it’s a smart purchase. Stan shares many surprising, money-saving tips that every savvy traveler should know.
Here are some of the topics we cover:
The variety of protections you can choose with travel insurance
How a plan fills the gaps in your medical coverage while traveling
What a typical travel policy costs
Who is a good candidate for travel insurance
How to insure your next adventure trip
Whether you should get an annual or single travel plan
How to save money when shopping for a travel insurance policy