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There’s no doubt that raising kids is expensive. According to a 2017 report from the U.S. Department of Agriculture, the average cost for a child through age 17 is about $235,000. That doesn’t even include the cost of college!

Fortunately, there are many good financial vehicles that help parents save and invest money for a child’s future. There’s no one account that makes sense for every family, but I’ll review the pros and cons of six of the best savings options so you know which one is right for you.

6 Ways to Save and Invest Money for Kids
  1. 529 college savings plan 
  2. 529 prepaid tuition plan 
  3. Roth IRA 
  4. UGMA/UTMA account 
  5. Brokerage account 
  6. Savings account

Here’s more detail about different ways to save money for kids.

1. 529 college savings plan

Paying for college is the most common reason that parents want to save money for their kids. If you or your child know that college is in the future, one of the best options is a 529 college savings plan.

With a 529 plan, you make contributions and invest them in a menu of options, such as mutual funds. Your money can be withdrawn tax-free when it’s used for education expenses, such as tuition, fees, books, required equipment, and room and board.

Funds in a 529 plan can be used at any accredited school in the country, and even at some foreign institutions.

Funds in a 529 plan can be used at any accredited school in the country, and even at some foreign institutions. For instance, you could live in New York, participate in a Florida 529 saving plan, and use the money to pay for a school in California.

Plus, starting in 2018, you can spend up to $10,000 per year tax-free on elementary and secondary school expenses, according to the Tax Cuts and Jobs Act. That gives parents the flexibility to make withdrawals for tuition and other educational expenses for a younger child who attends a public, private, or religious school.

Everyone can use a 529 savings plan because there’s no restriction on annual income. The maximum amount you can contribute each year varies on the plan you choose, but could be over six figures per student!

The funds in a 529 plan belong to the owner and the account can have one designated beneficiary, who is the future student. So, if you want to save for more than one child, you generally must open an account for each of them. But you can also change a 529 beneficiary to another member of the family or roll it over to another 529 plan without triggering tax consequences.

States generally sponsor their own 529 plans and many offer additional tax savings, such as a deduction on your state income taxes for contributions. The fees and benefits—such the maximum contribution limit, investment options, and in-state tax benefits—vary. So, it’s important to do your homework and compare plans across the country using sites like Collegesavings.org and Savingforcollege.com.

To sign up for a 529 you can go directly to the plan manager or use a financial advisor. No matter if you contribute $10 a month or $1,000 a month to a 529 plan, the sooner you get started, the easier it will be for you and your family to pay for college.

Pro: Due to all the benefits that come with a 529 plan, such as tax advantages, flexibility, and high contribution limits, it gets my vote for the best account to save for education costs. Additionally, distributions get favorable treatment because they're not factored as income in the calculation for the following year's financial aid eligibility.

Con: The main drawback is that using 529 funds for anything other than qualified education expenses, triggers income tax, plus a 10% penalty. So never contribute more to a 529 than you believe your child will need for the total of his or her education expenses. Also, you can’t begin investing until your child is born and has a Social Security number.

See also: 8 Investing Rules to Follow Even When the Stock Market Drops

2. 529 prepaid tuition plan

If you like the idea of setting aside money for a child’s education, but don’t want any investment risk, check out a 529 prepaid tuition plan. They’re offered by states or institutions, but aren’t available in every state. The idea is that college costs rise year after year, so locking in future tuition at today’s rate can save money.

Funds in a prepaid plan may be withdrawn so you can use them at an out-of-state school or at a private college.

But what if your child wants to go to a different school? Funds in a prepaid plan may be withdrawn so you can use them at an out-of-state school or at a private college. You can also change plan beneficiaries at any time if you have another potential student in the family.

You can even have both a 529 prepaid plan and a 529 college savings plan for the same beneficiary. The prepaid account would pay for tuition and the savings plan could be for other expenses, such as room and board, books, supplies, and computer equipment.

Pro: A 529 prepaid tuition plan doesn’t require you to choose investments or deal with any stock market volatility. Also, it’s not a factor in the calculation for the following year's financial aid eligibility.

Con: The major downside to a 529 prepaid plan is that if the beneficiary chooses an out-of-state school, you must pay the tuition difference out of pocket, and may not get the full value of the plan. Just like with a 529 savings plan, you must pay income tax plus a 10% penalty on funds spent on non-qualified expenses. And you must wait until your child is born and has a Social Security number to set him or her up as a plan beneficiary.

See also: 7 Micro Habits That Create Financial Success

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3. Roth IRA

I’m a big fan of the Roth IRA (Individual Retirement Arrangement) because it’s one of the best places to invest for the long-term. Not only does it give you tax-free money in retirement, but unlike other types of retirement accounts, you can spend it before retirement without having to pay taxes or an early withdrawal penalty.

Parents can give their child a financial head start by opening a Roth IRA in the child’s name.

Contributions to a Roth IRA are not tax deductible, but you can invest them in a broad menu of options, and withdrawals in retirement are completely tax free. Additionally, since you pay tax upfront, you’re allowed to withdraw original contributions at any time and for any reason, including a child’s education.

Many people don’t realize that kids can have an IRA. Parents can give their child a financial head start by opening a Roth IRA in the child’s name (a retirement account can never be owned jointly or owned for someone else).

But for a minor (or anyone) to qualify for an IRA, he or she must have their own earned income. In other words, children only qualify to have an IRA if they have a part-time job or self-employment income. As a parent, you can make an IRA contribution on a child’s behalf, if the child’s income is legitimate.

If a child earned money during the tax year, you or your child can contribute as much as he or she made, up to the annual limit, which is currently $5,500. But you can’t fund an IRA for an infant or toddler who can’t legitimately earn income. So, it’s generally just an option for teenage kids.

If you have a very young child or a non-working child, another option is to fund your own Roth IRA and then take withdrawals from it later to pay for college expenses. There is an annual income limit to qualify for a Roth IRA, so if you’re a high-earner you may be prohibited from contributing to one.

It’s easy to open a Roth IRA for a minor at most major banks, brokerages, and investing companies such as USAA and Betterment.

Pro: A Roth IRA offers flexible withdrawals of original contributions for college expenses. And unlike with a 529 plan, if you don’t end up needing some or all the money for college, you can simply leave it in a Roth IRA and use it for another reason or for retirement. Whether you or your child own the account, the balance is not counted in the calculation for financial aid.

Con: If you withdraw earnings in the account prior to age 59½, they may be subject to tax and penalties if the purpose is not an allowable exclusion. Also, withdrawals of contributions and earnings do count as income on the following year’s financial aid eligibility.

See also: What's the Difference Between a Roth 401k and a Roth IRA?

4. UGMA/UTMA account

What if you want to invest money for a child’s future, but don’t want the funds to be used only for education? In most states, minors can’t own investments and financial products in their own names. So, parents can’t just give an investment or transfer an asset to a minor child without creating a trust.

The most common trust for minors is a custodial account known as a UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act). These were created as simple ways to hold investments, real estate, and other assets for minors, in the care of an account custodian.

You can set up a custodial account at most banks and brokerage firms. You can make withdrawals to cover expenses that benefit the child. And when the child becomes an adult (usually 18 or 21, depending on your state), the assets automatically transfer into his or her name.

Pro: You can give a child as much money or assets as you like with no annual limits and you can also withdraw funds at any time and for any reason. A portion of investment earnings are taxed at your child’s income tax rate, which can cut taxes.

Con: The downside of UGMA and UTMA accounts is that once the child reaches the age of majority, parents have no control over how the child spends it. Also, custodial accounts are considered an asset of the child, which means they’re a larger factor in the financial aid calculation than if they were owned by a parent.

See also: Investment Tips--How and Where to Invest (the Easy Way)

5. Brokerage account

If you’re not sure whether money you save for a child will be used exclusively for education and you’re not eligible for a Roth IRA, another option is to invest through a taxable brokerage account, such as TD AmeritradeSwell, or Ally Invest. You can choose from a wide variety of investments and make withdrawals at any time and for any reason, such as your child’s education, a car, or a wedding.

Pro: A brokerage account gives you maximum flexibility and the potential for growth over the long term.

Con: You’ll owe income tax on your investment gains or losses each year in a brokerage account. Plus, the value must be included in the calculation for financial aid.

See also: 7 Simple Principles to Invest Wisely No Matter Your Age  

6. Savings account

An FDIC-insured bank savings account is one of the safest places you can squirrel away money for a child’s future. Problem is, it doesn’t come with many benefits. For example, you get very low rates of interest, and what you do earn is taxed as income.

If you open a savings account in a child’s name or your own, also consider using another account that offers more aggressive growth, such as a 529 plan, a Roth IRA, or a regular investing account.

These vehicles help you beat the average rate of inflation over the long-term, which has been about 3%. If you’re not earning more than 3%, what you set aside for your child’s future will lose value over time.

If you save $100 a month for 20 years in a bank savings that earns 0.25% interest, you’d accumulate less than $25,000. But if you put the same amount in an investment earning an average of 7%, you’d have over $52,000 after two decades.

Pro: The only advantage of a bank savings account is complete safety from investment risk.

Con: The main con is that using only a low-rate savings for your child’s future could cost many thousands in missed investment growth. Plus, the value must be included in the calculation for financial aid.

See also: Should You Invest Emergency Funds or Keep Cash?

When Should You Start Saving Money for Kids?

If you sacrifice your own financial security for your kids’ college, you may find yourself relying on them to support you in your old age!

A word of caution: Don’t get antsy and forgo saving for your own retirement to pay for college. Instead, create a financial plan that includes both college and retirement savings as soon as you start a family.

The sooner you start saving the less stress you’ll feel both psychologically and on your budget. And if you get a late start and can’t afford to pay for a child’s education, don’t feel guilty. Remember that putting retirement first is in your entire family’s best interest.

If you sacrifice your own financial security for your kids’ college, you may find yourself relying on them to support you in your old age! While it might seem coldhearted for a parent to refuse to pay for a child’s education, don’t forget that kids have options, such as:

  • Attending a relatively inexpensive state school or community college
  • Applying for a grant
  • Getting a job
  • Taking out federal student loans
  • Qualifying for a scholarship based on scholastic, athletic, or philanthropic achievements

But there are no loans or grants to support you after you stop working—except perhaps a meager Social Security income or a windfall inheritance. If you’re less than 20 years away from retirement and you have not reached 80% of your savings goal, don’t sacrifice a penny for college.

You must provide for your own financial well-being first, even if that means contributing less than you’d like to your kids’ education. And if you end up with a surplus of retirement savings, you can always pay off a child’s student loan debt down the road.

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Sya W. says, “In a couple of months I’ll be 19 and starting college. I work my tail off and still don’t bring home enough money. But even though I’m completely new to investing and know I’m not just going to 'get rich quick,' I want to create a good future for myself over the long term.

My main concern about investing in the stock market is being too young, because I’m bound to make mistakes. Do you think it’s too soon for me to invest or should I just go for it?”

Thanks for your question, Sya! I love that you’re thinking about your future at a young age and asking the right questions. Being curious and seeking knowledge is fundamental for achieving success, so I’m certain that there’s an amazing future ahead of you.

Starting early allows your money to compound and grow exponentially over time—even if you don’t have much to invest. So, my advice is to always start investing as early as possible. However, there are some key financial priorities and tasks that you should accomplish first.

In this post, I’ll cover five ways to know when you’re ready to invest. You’ll come away with a clear plan to prepare your finances and mindset, no matter how much or little money you have.

5 Ways to Know When You Should Start Investing
  1. You have emergency savings. 
  2. You have key insurance coverage. 
  3. You don’t have any dangerous debts. 
  4. You want money to grow over the long term. 
  5. You opened a retirement account.

Here’s more detail about each of the five ways to know when you’re ready to start investing.

See also: 7 Micro Habits That Create Financial Success

1. You have emergency savings.

Before you begin investing, your first financial priority should be accumulating some amount of emergency savings. Having a cash reserve is never a luxury, it’s a fundamental safety net that you should never go without.

Having a cash reserve is never a luxury, it’s a fundamental safety net that you should never go without.

Life is full of surprises and many of them drain your bank account! So before spending a dime on investments, ask yourself if you’re really prepared for the unexpected. In an instant, you could lose your job, see your business income dry up, get a serious illness, or experience a natural disaster. It’s not fun to think about these types of devastating situations, but they happen.

While no amount of money can reverse a tragedy, having a financial safety net can make it so much easier to cope. What you need depends on factors such as your living expenses, debt payments, income, and whether you have dependents.

At a minimum, strive to maintain an emergency fund equal to three to six months’ worth of your living expenses. For instance, if you spend $3,000 a month on essentials (such as housing, utilities, food, and debt payments), make a goal to keep at least three times that amount, or $9,000, in an FDIC-insured bank savings account.

You might set aside 5% or 10% of your gross pay or have $25 from each paycheck direct deposited into a savings account until you have a healthy cash cushion to land on if you’re faced with financial emergency.

If accumulating that much money seems out of reach, don’t worry. Just get started with a small goal, such as saving $500, then $1,000, until you have at least one month’s worth of security on hand.

Having even a small cash reserve is better than nothing because it can keep you from going into debt in the first place if you hit a rough financial patch (and who hasn’t?). Then continue building your emergency fund while you invest for the future at the same time.

A common question is whether you should invest your savings since the interest paid on a bank account is so low. The answer is almost always no, unless you have more than enough cash on hand.  

In general, your savings should not be invested because the value could drop at the exact moment you need to spend it. Remember that the purpose of an emergency fund is not to put it at risk to make it grow, but to preserve it so you can tap it in an instant if you need it.

See also: Should You Invest Emergency Funds or Keep Cash?

2. You have key insurance coverage.

Another key way to prepare for the unexpected and stay out of debt is to have the right kinds of insurance. Being underinsured or uninsured means that a disaster, theft, or accident could wipe out everything you’ve worked so hard to earn and jeopardize your entire financial future. 

Being underinsured or uninsured means that a disaster, theft, or accident could wipe out everything you’ve worked so hard to earn and jeopardize your entire financial future.

Before you begin investing, make sure you’ve considered purchasing five key types of insurance to protect your finances:

  • Auto insurance: This is required up to minimum state levels if you own a car. Even if you don’t, having a non-owner policy is wise if you regularly drive other peoples’ vehicles. But remember that having just the minimum oftentimes isn’t nearly enough. For instance, let’s say your state only requires you to purchase $10,000 of auto liability coverage. If you hurt someone and get sued for injuries and medical payments that total $200,000, you’d be on the hook for the balance of $190,000.  
  • Home insurance: This is required by lenders when you have a mortgage. It covers your dwelling, personal belongings, liability, and living expenses if you’re forced to move out after a disaster. Again, make sure you have more than the minimum amount of liability, if needed. The more income and assets you own, the more coverage you should have to stay safe. Also, if you’re a renter, don’t forget that you need coverage too. Renters insurance covers your personal belongings, liability, and living expenses if you’re forced to move out after a disaster. It’s a bargain for the protections your get, costing less than $200 per year on average.  
  • Health insurance: This is a non-negotiable coverage that every human being should have to protect both your health and your finances. All it takes is one visit to the emergency room or a short stay in a hospital to rack up a massive medical bill that could turn your financial world upside down.  
  • Disability insurance: This is an often-overlooked coverage that replaces a portion of your income (such as 60%) if you can’t work due to a covered illness, injury, or accident. These could include having cancer, a back injury, heart disease, or becoming pregnant. There’s a one in three chance that you’ll become disabled for at least three months sometime during your working years. But if you have a disability policy, you can continue to pay your bills even when you can’t earn an income.  
  • Life insurance: This is a must for anyone with a spouse, partner, or family who would be hurt financially if you died. You can protect loved ones with inexpensive term coverage that may not cost more than $200 a year for a $500,000 benefit, if you’re in relatively good health.

Check out Policygenius to get free quotes for any of these types of insurance. The key to getting the best deal is to shop and compare quotes from multiple insurers.

The bottom line is that if you don’t have an emergency fund and don’t have insurance that’s critical for your safety, you’re living on the edge. Shore up your financial defenses before you begin investing.

See also: 3 Facts About Usage-Based Car Insurance That Can Save Money 

3. You don’t have any dangerous debts.

In my book, Money Girl’s Smart Moves to Grow Rich, and my new online course, Get Out of Debt Fast—A Proven Plan to Stay Debt-Free Forever, I offer lots of detailed advice about managing debt. One important point I cover is that dealing with any dangerous debts—such as delinquent taxes, overdue child support, or a judgement from a collections agency—should be a priority.

If you have a large amount of dangerous debt, you may need to seek legal advice to make the best decisions about getting it under control before you start investing.

When serious debt looms over you, take care of it quickly so it doesn’t wreak havoc on your financial life. If you have a large amount of dangerous debt, you may need to seek legal advice to make the best decisions about getting it under control before you start investing.

I also recommend addressing high-rate debt, such as a credit card that’s in the double-digits. Consider what’s more profitable: saving the interest you’re currently paying or investing money with the expectation that it will grow.

Paying off debt gives you a straightforward, guaranteed return. For instance, if you’re carrying debt on a credit card that charges 26% interest annually, paying it off is an immediate 26% return.

You’d be hard-pressed to find an investment that pays a 26% return after taxes. So, paying off that high interest credit card is a much smarter financial move than investing. But it’s a tougher call when you have more reasonable debt, such as a 4% mortgage or a 5% student loan, that also come with tax deductions.

I’d argue that you can invest and get a return that exceeds the interest rate you’re paying for a mortgage or student loan. Plus, paying off a low-interest loan early could leave you cash-poor in the case of an emergency.

My advice is to invest your extra money, instead of using it to pay down debt, when the after-tax earnings should be higher than the after-tax interest rate you're paying. However, the best choice for you depends on your risk tolerance. It’s called personal finances because we’re all different. Decisions that make you feel comfortable may seem very risky to the next person.

If you still feel conflicted about the debt-versus-investing issue, one solution is to do both. You could send half your extra money to prepay a low-rate debt and half to an investment. But I want to be clear that paying down dangerous or high-rate debt should generally come before investing.

4. You want money to grow over the long term.

Once you’ve prepared for unexpected events that could be around the corner and addressed any dangerous debts, it’s time to turn your attention to investing. But first, let’s take a step back and remember why you need to invest in the first place.

Why do you really need to put any amount of your money at risk in the first place? The answer is that most people can’t achieve their long-term goals and build enough wealth without investing. If you leave money for retirement in a safe, but low-rate bank savings or CD, it doesn’t have the opportunity to grow.

In fact, leaving money in a savings accounts can cause you to lose money. That’s because the historical rate of inflation has been about 3%. So, if you earn less than 3%, your money loses value over the long term.

If you earn less than 3%, your money loses value over the long term.

To get over that hurdle, and hopefully earn double or triple that rate of return, you’ve got to invest. The reality is that not taking enough investment risk can be the riskiest move of all!

Historically, a diversified stock portfolio has earned an average of 10%. But even if you only get a 7% average return, you’ll have over $1 million to spend during retirement if you invest $400 a month for 40 years.

But higher return investments usually bring higher risks, so they need to be used carefully. In other words, investing means that you could possibly lose money. This risk creates a tension that keeps many people from getting started investing in the first place.

If you’re hesitant to begin, it’s time to jump in and make a goal to invest as much as possible as soon as possible. The ideal amount is a minimum of 10% to 15% of your income.

But if you can’t set aside that much, there’s no shame in starting small. Even investing 1% or $20 a month is a great start and is better than nothing. Then increase your contributions by a percent or two each year. And if you’re starting late, don’t stress about it—just get motivated to start right now.

To sum up, a savings account is the perfect place for your emergency fund. But when your goal is to build a big nest egg for the future, letting your money earn next to nothing in a low-interest savings account won’t get you there.

5. You have a retirement account.

The final way you know that you’re ready to invest for the long-term is when you’ve opened a retirement account. To get faster results, it’s wise to max out a tax-advantaged retirement account before you put money in a regular, taxable investing account.

To get faster results, it’s wise to max out a tax-advantaged retirement account before you put money in a regular, taxable investing account.

If you have a retirement plan at work, such as a 401k or 403b, that’s the first place your money should go. I’m a big fan of these plans because they give you multiple benefits. Not only do they automate investing by deducting contributions straight out of your paycheck before you can spend them, retirement plans cut your taxes. And you can take all your money with you (including any vested matching funds) if you leave the company.

Don’t have a job that offers a retirement plan? No problem, just about everyone can have an IRA (Individual Retirement Arrangement). And there are retirement accounts for the self-employed, such as a SEP IRA or Solo 401k.

Set it up for monthly recurring electronic contributions from your checking account so your investments are spread out over the year and happen on autopilot. Just remember that taking money out of a retirement account generally means getting hit with a 10% early withdrawal penalty if you’re younger than age 59½. So, it’s wise to leave retirement accounts untouched for as long as possible to avoid taxes and penalties and get maximum growth.

One of the most powerful ways to build wealth and financial security is pretty boring. Simply choose low-cost funds inside a retirement account and contribute 10% to 15% of your income over a long period of time.

So never forget to start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest now and will catch up later. If you wait for a someday raise, bonus, or windfall, you’re burning precious time.

Years from now when you’ve got savings and investments to fall back on or to fund the lifestyle of your dreams, you’ll be so happy that you took control of your financial future.

See also: 7 Simple Principles to Invest Wisely No Matter Your Age  

Get More Money Girl!

To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

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I recently received a phone call from my husband who was on his way to the doctor for an annual checkup. He said, “Can I use our HSA debit card to pay for parking at the doctor’s office?” Adam is very savvy with money, so any time he has a financial question, I’m certain other people are wondering the same thing and I should write and podcast about it.

We love using our HSA (health savings account), because it’s a legal way to pay less tax and save for the future. But the IRS imposes many rules about how you can fund an HSA and spend the money. You need to be very familiar with the rules to leverage the account and use it to its full potential.

In this article, I’ll cover key points you should know about HSAs, review seven major benefits they offer, and answer my husband’s parking question. Plus, you’ll learn 10 often-surprising, but allowable expenses that you can pay for using an HSA.

10 Savvy Ways to Use an HSA
  1. Prescription sunglasses 
  2. Eye surgery 
  3. Dental care 
  4. Chiropractic 
  5. Acupuncture 
  6. Fertility enhancement 
  7. Drug and alcohol addiction treatment
  8. Care from a psychologist or psychiatrist 
  9. Home improvements 
  10. Transportation and travel

Before we go into more detail on these HSA savings, here's background on what an HSA is and who can use them to pay for approved medical expenses.

What Is an HSA (Health Savings Account)?

An HSA is a special tax-exempt account that you set up for the sole purpose of paying eligible medical expenses. But to qualify for one, you must first have a special type of health insurance, which I’ll cover in a moment.

The beauty of an HSA is that contributions are deductible on your tax return, even if you don’t itemize deductions.

You can contribute to an HSA if you get health insurance as an individual or through a group plan at work. You always own and manage an HSA as an individual and there are no income limits to qualify. That means you don’t need permission from an employer or the IRS to set one up and it stays with you even if you change jobs or become unemployed.

The beauty of an HSA is that contributions are deductible on your tax return, even if you don’t itemize deductions. The funds can earn interest or be invested for potential growth in a menu of available options, such as mutual funds. And when you take distributions to pay for qualified medical expenses, your original contributions plus any earnings are completely tax-free.

Contributions to an HSA can come from you, someone else, or an employer. Some company benefits include regular deposits into an HSA, such as $150 a quarter. Just like with matching funds for a retirement plan (such as 401k or 403b), HSA contributions from an employer are not included in your taxable income, a fantastic benefit!

Depending on your income tax rate, using an HSA to pay for allowable medical expenses means getting about a 20% to 30% discount. Over your lifetime, that can add up to huge savings!

Unlike another type of medical savings account called a Flexible Spending Arrangement (FSA), there’s no deadline to spend money in an HSA. Funds can stay there indefinitely until you want to use them, even if you change your insurance company, become uninsured, or are unemployed.

Depending on your income tax rate, using an HSA to pay for allowable medical expenses means getting about a 20% to 30% discount. Over your lifetime, that can add up to huge savings!

So, don’t confuse these two popular medical savings accounts:

  • FSA, or flexible spending arrangement, is a health savings account that’s offered by employers only and must be funded through payroll deductions on a pre-tax basis. It comes with an annual use-it-or-lose it policy. 
  • HSA, or health savings account, can only be opened by individuals and permits tax-deductible contributions with no spending deadline.

Just like with a retirement account, you should never put money in an HSA that you might need for everyday expenses. You can only use HSA funds to pay for current or future qualified, unreimbursed medical expenses—otherwise withdrawals are subject to income tax plus a hefty 20% penalty.

However, an often-forgotten benefit is that after your 65th birthday, you can spend HSA funds on non-medical expenses with no penalty. You can spend the funds on anything you like, such as a trip to Europe, and it would simply be subject to ordinary income tax.

In other words, an HSA morphs into something that looks like a traditional retirement account if you keep it long enough. That’s a great reason to max it out every year, even if you don’t expect many medical expenses.

See why I like HSAs so much? The tax benefits are better than a retirement account. You get:

  • Tax deductible contributions
  • Tax free earnings
  • Tax free withdrawals
  • Penalty-free withdrawals after age 65
What Is a High Deductible Health Plan?

I mentioned that you need a special type of health insurance to qualify for an HSA. It’s called a high deductible health plan (HDHP). A deductible is the amount you must pay for covered medical expenses before your benefits begin each year.

While you might think that it’s better to have a lower deductible and pay less out-of-pocket, having a higher deductible reduces your monthly insurance premiums. Deductibles and premiums have a seesaw relationship because increasing one generally makes the other go down.

More employers are offering HDHPs to help workers keep premiums as low as possible. No matter if you get health insurance on your own or through work, find out if it’s an HSA-qualified plan, so you can get all the medical savings possible!

But remember that a high deductible health plan isn’t the right choice for everyone. They work best when you're in relatively good health and aren't likely to spend the full deductible each year.

You can make tax-deductible contributions at any time during the year, even up to April 15 for the previous tax year. But you’re never required to make contributions to an HSA.

See also: HSA Rules After Leaving a High Deductible Health Plan

How Much Can You Contribute to an HSA?

For 2018, you can contribute a total of up to $3,450 to an HSA when you have insurance just for yourself, or $6,850 if you have a family plan. If you’re age 55 or older you can contribute an additional $1,000 to an HSA when you have either an individual or a family health plan.

You can make tax-deductible contributions at any time during the year, even up to April 15 for the previous tax year. But you’re never required to make contributions to an HSA.

If you qualify for an HSA, they're available at many banks, credit unions, brokerages, and specialty institutions. Most are convenient to use and offer paper checks, a debit card, and online banking. A couple of great places to open your account are Lively and HSA Bank.

See also: How to Save Money on Healthcare with an HSA

What Are Allowable HSA Expenses?

Once you’ve opened an HSA and have a balance to spend, understanding what you can spend it on is critical. Allowable expenses include a wide range of medical costs you might incur until you meet your annual deductible, or that simply aren’t covered by your health plan.

The IRS says for an expense to be HSA-qualified, it must pay for healthcare services, equipment, or medications. There are many covered expenses that you might not expect, and I’ll cover 10 of them in a moment.

You need a prescription to buy drugs (except for insulin) with HSA funds. So, if you can get a prescription for drugs that are also available over-the-counter, such as Allegra, you can also buy them using tax-free HSA money! And if you mistakenly pay for a qualified expense out of pocket, you can reimburse yourself from the account (if the expense occurred after your HSA was established).

See also: Rules for Your Health Savings Account (HSA)

10 Savvy Ways to Use an HSA

There are hundreds of potential HSA-qualified medical expenses and you can see the full list in IRS Publication 502, Medical and Dental Expenses. But I’ll cover 10 allowable expenses for yourself or a family member that may surprise you.

1. Prescription sunglasses

Paying for an annual eye exam and new prescription sunglasses are one of my favorite ways to spend HSA money. Of course, regular prescription eyeglasses and contact lenses are also qualified expenses.

2. Eye surgery

Any costs you might have to pay out-of-pocket for surgery to correct your vision, such as LASIK or the removal of cataracts, can be paid for using HSA funds. And if your vision or hearing is impaired, you can also use it to purchase and care for a guide dog or other service animal.

3. Dental care

Going to the dentist is also covered for routine cleanings and the prevention of dental disease. You can use your HSA for services such as fluoride treatments, X-rays, fillings, extractions, dentures, and braces. Teeth whitening is not a qualified expense, nor is any cost or treatment that’s purely cosmetic.

4. Chiropractic

All chiropractic care is HSA-qualified, even if it isn’t covered by your insurance plan. So, don’t hesitate to seek it as an alternative for pain relief before you go for medication or surgery.

5. Acupuncture

I’ve never received an acupuncture treatment, but I know several people who have used it to successfully treat allergies, pain, and infertility. So, if you’ve been wanting to give acupuncture a try, but it isn’t covered by your health insurance, you could pay for it tax-free using an HSA.

Remember: Funds remain in the account from year to year for your entire life, with no penalty if you don’t spend them.

6. Fertility enhancement

And speaking of infertility, you can use an HSA to pay for any treatment to overcome an inability to have children, such as in vitro fertilization. Once you’re a parent, you can also spend it on breast pumps and supplies that assist lactation.

Or you can use an HSA to go the opposite direction and pay for birth control, sterilization, or a legal abortion.

7. Drug and alcohol addiction treatment

Any amount you pay for yourself or a family member to have inpatient treatment at a drug rehabilitation center, including meals and lodging, is HSA-qualified. You can also pay for transportation to and from Alcoholics Anonymous meetings in your community.

8. Care from a psychologist or psychiatrist

Costs to support yourself or a family member through the treatment of a mental condition or illness is HSA-qualified. You can use HSA funds to pay for a patient’s treatment at a health institute if treatment is prescribed by a physician to alleviate a physical or mental disability or illness.  

9. Home improvements

Any special equipment or improvements installed in a home to care for you or your family members can be paid for with HSA funds, if their purpose is medical care. These might include constructing entrance ramps, widening doorways, installing lifts, or lowering cabinets and sinks.

Another capital expense that’s HSA-qualified is the removal of lead based paint in a home you own or rent.

10. Transportation and travel

Costs to get to and from any type of medical care, whether it’s on a bus, taxi, train, plane, or ambulance, can be paid for with HSA money. This includes making regular visits to see an ill family member, if visits are recommended as part of treatment. You can include lodging, but not meals, when you travel to another city for medical purposes.

And getting back to my husband’s question, if you use your own vehicle to get to medical services, you can include out-of-pocket costs, including, gas, oil, tolls, and parking fees, as HSA-qualified. However, you can’t include general vehicle maintenance or insurance costs.

7 Major Benefits of an HSA

To sum up, here are 7 major benefits of having an HSA:

  1. Contributions are tax deductible up to the annual legal limit. That means you reduce your taxable income and the amount of tax you must pay by funding the account. 
  2. Funds remain in the account from year to year for your entire life, with no penalty if you don’t spend them.
  3. Withdrawals are never taxed if you spend them on qualified medical expenses.
  4. Your balance grows tax-free when you have interest earnings or investment gains, if you spend them on qualified medical expenses.
  5. Funds can be used for you, your family, or your dependents when there are qualified, out-of-pocket, medical expenses.
  6. You own the account and decide how much to save or spend each year. An HSA is portable, so if you change employers, switch health plans, or become unemployed, it’s yours to keep.
  7. You can fund an HSA for the first time using money you’ve already saved in an IRA by doing a tax-free rollover from your IRA into an HSA once in your lifetime, up to the annual contribution limit.

See also: 10 IRA Facts Everyone Should Know

Get More Money Girl!

To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

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If you’re confused by all the tax-advantaged retirement account options you can choose from, you’re not alone. While it’s great to have more choices than fewer, it can certainly cause analysis paralysis.

Instead of getting caught in a fog of retirement confusion, it’s time to get clarity. Using one or more retirement accounts to sock away savings on a regular basis is the best way to build wealth for the future.

In this post, you’ll learn three simple steps to choose the right accounts for your situation. Plus, I’ll answer a couple of questions on this topic that I recently received from podcast listeners.

3 Simple Steps to Choose the Right Retirement Accounts
  1. Know the retirement account restrictions.
  2. Choose your retirement plans.
  3. Choose your retirement tax types.

Let's explore these steps in more detail. 

Step #1: Know the retirement account restrictions.

If you understand a couple of restrictions that the IRS imposes on retirement accounts, you can easily use the process of elimination to select accounts. The only restrictions you need to keep in mind are 1) an income limit for the Roth IRA (Individual Retirement Arrangement) and 2) a deduction limit for the traditional IRA.

What’s the Roth IRA Income Limit?

The Roth IRA is the only retirement account that factors in annual income for eligibility. You’re prohibited from making contributions when your income exceeds certain amounts for your tax filing status.

The Roth IRA is the only retirement account that factors in annual income for eligibility. You’re prohibited from making contributions when your income exceeds certain amounts for your tax filing status.

For 2018, if you file taxes as a single and your modified adjusted gross income (MAGI) is higher than $135,000, you cannot contribute to a Roth IRA. And when you earn from $120,000 to $135,000, you’re in a phase out range, which reduces the amount you can contribute.

If you’re married and file taxes jointly, you cannot contribute to a Roth IRA when your household’s joint MAGI exceeds $199,000. And when you earn anywhere between $189,000 to $199,999, your contribution is reduced.

In other words, when you earn below the phase out ranges for your tax filing status ($120,000 for singles and $189,000 for when you’re married filing jointly), you can max out a Roth IRA. For 2018, you can contribute up to $5,500, or $6,500 if you’re over age 50, if you have at least that amount of earned income for the year.

If your income is in a phase out range, you might be allowed to contribute $4,000 instead of $5,500, for example. To calculate your allowable contribution, there’s a worksheet in IRS Publication 590-A.

But what happens if you open a Roth IRA but have income that rises above the allowable threshold? There’s no downside. You can keep the account, enjoy its tax-free growth, and manage your investments any way you like. You just can’t make any new contributions to a Roth IRA when your income exceeds the annual allowable limit.

Please note that this income limit doesn’t apply to Roth accounts you may be offered at work, such as a Roth 401k or a Roth 403b. You can always contribute to a workplace Roth, no matter how much you earn.

What’s the Traditional IRA Deduction Limit?

Now, let’s cover the second restriction that I mentioned, which is a deduction limit on the traditional IRA.

A major advantage of traditional retirement accounts is getting a tax deduction for contributions. For example, if you earn $50,000 doing freelance work and max out a traditional IRA by contributing $5,500, your taxable income for the year would be reduced to $45,500. The lower your taxable income, the less tax you pay.

But when you or a spouse are covered by a retirement plan at work, your allowable deduction for contributions to a traditional IRA may be reduced or eliminated, depending on how much you or your spouse earn.

When you or a spouse are covered by a retirement plan at work, your allowable deduction for contributions to a traditional IRA may be reduced or eliminated, depending on how much you or your spouse earn.

For 2018, if you file taxes as a single and your MAGI is higher than $73,000, you can contribute to a traditional IRA, but you can’t deduct contributions on your taxes when you also have a workplace retirement plan. And when you earn anywhere between $63,000 to $73,000, you’re in a phase out range, which reduces the amount you can deduct.

If you’re married and file taxes jointly with MAGI more than $121,000, you can’t deduct traditional IRA contributions when you have a workplace plan. And when you earn anywhere between $101,000 to $121,000, the deduction is reduced.

To make this restriction a bit more complicated, if you’re married and don’t have a retirement account at work, but your spouse does, there are also deduction limits. In this situation, if you live with your spouse or file a joint tax return, you can’t deduct traditional IRA contributions if your household MAGI exceeds $199,000. And the phase out range is from $189,000 to $199,000.

Again, this deduction limit doesn’t prevent you from being eligible for a traditional IRA. You can always max one out, but the tax deduction you receive may be reduced or eliminated.

You may be wondering if it’s worth it to make non-deductible contributions to a traditional IRA. They’re not as good as deductible contributions, but you may not have another option if you’re a higher earner.

The good news is that non-deductible contributions to a traditional IRA still grow tax-deferred until you take withdrawals in retirement, giving you substantial tax savings over time.

Step #2: Choose your retirement plans.

Now that you understand that high earners have income and deduction limits, you can use this information to choose retirement plans. Here’s a summary of the three main types of retirement plans:

  1. Employer-sponsored. Can be used when offered by your employer. Examples include a 401k, 403b, or a 457 plan.  
  2. Self-employed. Can be used by any individual with some amount of self-employment income. Examples include a SEP-IRA, solo 401k, or a SIMPLE IRA.  
  3. Individual. Can be used by any individual (including minors) with some amount of earned income, or by a spouse with no income who files taxes jointly. The only two options are a traditional IRA and a Roth IRA.

You can even have multiple retirement plans as long as you don’t exceed their annual contribution limits. For instance, if you have a job with a 401k and income from a side business, you can contribute to an IRA, a 401k, and a SEP-IRA in the same year.

Rules for Employer-Sponsored Retirement Plans

If you’re fortunate enough to have a retirement account at work, that’s the first plan you should choose. Not only do they come with high contribution limits and broad federal legal protections, but many employers offer free matching funds just to reward you for participating.

If you’re fortunate enough to have a retirement account at work, that’s the first plan you should choose. Not only do they come with high contribution limits and broad federal legal protections, but many employers offer free matching funds just to reward you for participating.

For 2018, you can contribute up to $18,500, or $24,500 if you’re over age 50, to most types of employer-sponsored retirement plans. If your employer pays matching funds, you can exceed the annual limits.

Rules for Self-Employed Retirement Plans

If you don’t have a workplace retirement plan, but are self-employed, a SEP-IRA is a good choice if you have employees or plan to someday. And if you’re a solopreneur with no employees, a solo 401k is a great option.

For 2018, you can make SEP-IRA contributions for each of your employees (including yourself) up to 25% of each employee’s compensation for a maximum of $55,000. If you have a 401k or 403b with another employer, the total you can contribute to both plans is limited to 100% of your compensation, up to $55,000.

With a solo 401k, you can contribute up to 25% of your net earnings up to $55,000, or $61,000 if you’re over age 50. If you also participate in a 401k at another company, the total employee contribution you can make to both plans is $18,500 or $24,500 if you’re over 50.

See also: 5 Steps to Create Your Own Self-Employed Benefits Package

Rules for Individual Retirement Plans

If you’re a worker who doesn’t have a retirement plan at work, your go-to option is an IRA. As I mentioned, just about everyone is qualified to have one and you can combine them with other types of retirement plans.

However, IRA contribution limits are relatively low. As I previously mentioned, for 2018, you can contribute up to $5,500, or $6,500 if you’re over age 50. So, maxing out an employer-sponsored plan or a self-employed plan first makes sense, when possible.

I received a related question from Bill L. who says, “Love the podcast. What options do temporary or part-time employees have to cut taxes and save for retirement when they don’t qualify for a workplace plan that’s only offered to full-time employees?”

Thanks for your note, Bill. Many people work for small businesses that don’t offer a retirement plan or that require you to be a full-timer to qualify. Unfortunately, administering a retirement plan is costly for companies, so consider yourself lucky if you do have one at work.

The solution for anyone who doesn’t have a retirement plan at work is to open an IRA.  And if you work for yourself, you can also choose retirement plans just for the self-employed.

Bonus Tip from The Penny Hoarder

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Visit The Penny Hoarder to read more about the 30+ legitimate ways you can make money at home.

Step #3: Choose your retirement tax types.

After choosing one or more types of retirement plans to fund, a key decision will be which tax type to choose: traditional, Roth, or both. Most retirement accounts come with a Roth option and you can split contributions to both types, as long as you don’t exceed the annual contribution limit.

Most retirement accounts come with a Roth option and you can split contributions to both types, as long as you don’t exceed the annual contribution limit.

For example, if you’re qualified for a Roth IRA and are under age 50, you could contribute $2,000 to a traditional IRA and $3,500 to a Roth IRA in the same year—but not $5,500 to both.

The same concept applies when you have a workplace plan with a Roth option. You could contribute $10,000 to a traditional 401k and $8,500 to a Roth 401k in the same year—but not $18,500 to both.

So, how do you know if a traditional, Roth, or a combination of tax types is right for you? Well, start by answering these three questions:

1. Is my income tax rate going to be higher or lower in retirement?

With any traditional retirement plan, you get a break by delaying taxes until you take withdrawals in retirement. You end up paying tax on your original contributions and their investment growth.

Roth accounts work the exact opposite way. With a Roth, you pay tax upfront on contributions, and then pay zero tax on withdrawals in retirement. You skip paying tax on all the investment earnings, which can be a massive savings.

To pay as little tax as possible, consider if your income tax rate could be lower now relative to when you retire. If you believe that you’ll be in the same or a higher tax bracket in retirement, choosing a Roth is best.

The idea is that paying tax on Roth contributions upfront at a lower rate saves you money. Here are some situations where your tax rate could be higher in retirement than it is today:

  • You’re currently in an entry-level job and expect to be earning more in the future. 
  • You expect to receive an inheritance in the future. 
  • You have a hunch that income tax rates for all Americans will rise in the future.

But if you’re further along in your career and earn more now than you believe you will in retirement, you’re generally better off with a traditional IRA or traditional plan at work. When you take withdrawals in retirement, you’ll end up paying less tax if you have a lower tax rate than you do today.  

Problem is, none of us really know what will happen in the future, especially if you’ve got a long way to go until retirement. So, if you’re not sure about your tax rates, another tip is to diversify by having both traditional and Roth accounts. That way you’ll have taxable and non-taxable money to spend in retirement.

For instance, you could put half your contributions in a traditional 401k and half in a Roth 401k. Or you might have a Roth retirement plan at work and a traditional IRA on your own.

See also: Which Is Best: A Roth or Traditional Retirement Account?

2. When do I prefer to pay income tax?

While most people would prefer to never pay taxes, when it comes to your retirement nest egg, at least you have control over when you pay them.

If you have a heavy tax burden from high earned or investment income, making contributions to a traditional retirement account is a smart way to reduce what you owe. You’ll get a tax deduction in the year you make traditional retirement contributions, which cuts your current tax bill.

If you have a heavy tax burden from high earned or investment income, making contributions to a traditional retirement account is a smart way to reduce what you owe.

Roth contributions are never tax deductible, so they don’t help your current tax situation. But, as I mentioned, the beauty of a Roth is that withdrawals in retirement are completely tax free. If your account mushrooms in value over many years, you get to keep every penny in retirement.

So, your current and future tax situation plays a big role in whether you should use a traditional or Roth retirement account. But don’t get too bogged down in the decision. You can always start or stop contributions at any time if your financial situation changes.

3. Do I want penalty-free access to the account before retirement?

Tapping a retirement account before you reach the official retirement age of 59½ typically comes with having to pay income tax, plus a 10% early withdrawal penalty. While you might think it’s unfair to have your wrist slapped, financially speaking, to access your own money, the purpose is to make sure you have funds to spend in retirement, not before!

However, there are some exceptions. Roth accounts offer more flexibility than traditional ones when it comes to taking early withdrawals. That’s because you must pay tax upfront and you control the account as an individual. A Roth IRA allows you to withdraw your original contributions (but not their earnings) at any time and for any reason.

While I recommend leaving retirement accounts untouched until you retire, having a Roth IRA does give you the most flexibility to tap your funds ahead of retirement. So, if you’ve got a long way to go and are worried that you might need to spend some of your retirement savings, choose a Roth IRA, if you’re eligible.

I received a question from Kathryn M. who’s got a retirement account dilemma. She says, “I contribute $18,000 per year to a traditional retirement plan at work, but we also have a Roth option. I don’t have an IRA, but I’m leaning toward choosing a Roth IRA since I already have a traditional account at work. But my boyfriend and I expect to get married in a couple of years and our joint income will likely be too high to qualify for a Roth IRA. So, should I open a traditional IRA instead and change my contributions at work to the Roth option?”

Thanks for your note Kathryn and congratulations on doing such a great job earning and saving! I’m a big fan of using a Roth at work because they don’t come with income limits and allow you to make relatively high annual contributions. So, unless you really need the tax deduction of a traditional plan, switching over to the Roth at work makes sense.

Again, unless you need the tax deduction of a traditional IRA, I’d open a Roth IRA while you’re eligible. And if your joint income makes you ineligible down the road, you can simply let it ride and contribute to a traditional IRA instead.

We’ve covered some of the biggest considerations for choosing retirement accounts, but there’s no right or wrong answer. If you’re still not sure, having a combination of tax-deferred and tax-free accounts covers all the bases.

Get More Money Girl!

To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

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If you love the idea of traveling, but always seem to find excuses not to book your next trip, it’s time to reframe your mindset about chasing adventure. Whether you only get away for long weekends or take extended tours, it’s possible to do it all on a budget.

The trick to traveling for less, known as travel hacking, is to tap multiple tools—credit cards, alerts, and reward programs—and to be creative. Often, assembling your trip piecemeal, rather than buying a package, is the secret for snatching the best travel deals.

To learn more travel secrets, I interviewed Jen Ruiz, who wrote The Affordable Flight Guide: How to Find Cheap Airline Tickets and See the World on a Budget. After realizing that travel made her happy, she decided to make it a priority before turning 30. In 2017, Jen set out to take 12 trips in 12 months, while holding down her full-time job as an attorney for a non-profit.

Jen surpassed her goal and completed 20 trips to destinations including Greece, Argentina, Thailand, and Iceland. And she did it on the cheap, with flights that cost as little as $5 one way and averaged $300 roundtrip.

Jen’s budget travel tips have been published in many top outlets, including the Washington Post and ABC News. The Naples Herald named her on their Top 40 Under 40 list. She documents her travels and budget tips on her site, Jen On a Jet Plane.

Some money-saving topics we cover include:

  • How she flew to New Zealand for less than $38
  • The fastest ways to accrue airline points for free fares
  • Smart ways to use credit card travel rewards
  • Tips for using one-way flights to your advantage
  • The best ways to let deals and error fares to come to you
  • Best search tips, including Google Flights and going incognito
  • Why you should get all airfare deals, not just those from nearby airports

I decided that I wasn't going to let not having a travel companion stop me from traveling. - Jen Ruiz

[Listen to the interview using the audio player on this page or on Apple PodcastsSoundCloudStitcher, and Spotify]

The following tips were contributed by Jen Ruiz.

Flight Myths Debunked: 7 Common Booking Misconceptions That Are Costing You Money

There is so much misinformation circling the internet about how to find a cheap flight that it’s easy for first-time travelers and frequent flyers alike to become overwhelmed by the prospect of hunting for a flight deal. When I first started booking airline tickets on a regular basis, I tested every strategy out there in hopes of stumbling across one magic solution that would reduce all my future flight costs in one click.

Through trial and error, I realized that great deals exist and are accessible to everyday people, but there’s no magic site or travel hack. Finding a valid airline ticket at a steal price requires a combination of opportunity, timing, flexibility and a willingness to put your money where your mouse is.

To help you navigate the flood of information, here are some common misconceptions about booking flights that are costing you big bucks.

Myth #1. The best day and time to book is “X.”

You may have heard that the best day to buy a flight is Tuesday, or that the best time to book is six weeks out from a trip. All that is conjecture. At the end of the day, the best time to buy is when a deal pops up, and not a second later. Don’t wait to share it with your friends or verify that you have the time off from work. Book first, ask questions later. Which leads me to my second point…

Myth #2. You can never get a refund.

Even non-refundable flights have a 24-hour refund window. If you book then change your mind, you can cancel the entire thing like it never happened. Also, some airlines will work with you to reimburse the cost of any subsequent price drop after you purchase, and all will refund your fare if there’s a delay or change in itinerary attributable to the airline.

Myth #3. You need a credit card to earn points or miles.

Many people are discouraged from travel hacking because they think the only way to earn bulk miles is by opening a credit card. Granted, credit cards are a great way to exponentially grow your miles, but they’re not essential. You can log miles for flights taken on partner airlines and earn points online by shopping through partner links or completing surveys.

Myth #4. Roundtrip fares are the best deals.

Roundtrip fares have long been preferred in the booking process, but I’m an advocate of one-way flights. You get more value for point redemptions when booking award travel, can customize your itinerary to add intentional connections, and they give you the flexibility to book your trip piecemeal, making your own travel lay-a-way plan.

Myth #5. You should be loyal to one airline.

JetBlue and Norwegian are two examples of budget carriers that won’t make you feel like you’re flying for cheap.

This may be a good tactic if you’re aiming for elite status or first class upgrades, but deal hunters are looking for the best price overall. It’s better to cast a wide net, across multiple search engines and websites to ensure you get rates for airlines that don’t show up in all results, like Southwest and Allegiant.

Myth #6. You can’t fly comfortably on a budget.

Budget airlines are often synonymous with discomfort, with seats that are unable to recline, minuscule tray tables and a general lack of in-flight entertainment. Not all airlines are created equal, however. JetBlue and Norwegian are two examples of budget carriers that won’t make you feel like you’re flying for cheap. You can also score first class tickets on the cheap with sale alerts or bidding for upgrades.

Myth #7. Error fares are for suckers.

A lot of people see error fares and steer clear, thinking it will be a waste of their time. While it’s true that there’s always a chance the airline won’t honor the ticket, your money will be refunded in the event it can’t be honored so you have nothing to lose. Just hold off on making any binding reservations at your destination until after you know for sure.

Get More Money Girl!

If you're ready for help managing debt, building credit, and reaching big financial goals, check out Laura's private Facebook Group, Dominate Your Dollars! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.

To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

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The purpose of your credit file with the major bureaus, such as Equifax, Experian, and TransUnion, is to allow creditors and merchants to get a complete picture of your financial life and evaluate you accurately. A credit bureau doesn’t make judgments or lending decisions—they simply maintain your credit report, which is a history of data reported to them.  

The good news is that positive credit information can stay on your credit history indefinitely, and at least for 10 years. But the bad news is that negative information sticks around for a long time, too, according to your state’s law and the Fair Credit Reporting Act (FCRA).

In this post, I’ll cover nine negative items that can appear in your credit history and for how long.

9 Negative Items That Can Be Listed on Your Credit Reports
  1. Bankruptcy
  2. Civil judgment or lawsuit
  3. Tax Lien
  4. Late payments
  5. Charge Off
  6. Collections
  7. Settlement
  8. Voluntary surrender
  9. Foreclosure

Here’s what you should know about the different types of negative information that can appear on your credit history and when they disappear.

1. Bankruptcy

Filing bankruptcy is one of worst items for your credit. It’s a federal legal process where you declare yourself unable to pay your debts. A bankruptcy is entered into the public records, and then gets picked up by the credit bureaus. The two most common types for individuals are Chapter 7 and Chapter 13.

With a Chapter 7 bankruptcy, you agree, in exchange for your debt being erased, that your property (except types exempt under state law) can be sold to raise cash. This is terrible for creditors because they may receive little or none of the amount you owe. Chapter 7 stays on your credit report for 10 years after the filing date.

With a Chapter 13 bankruptcy, you keep all your property, but agree to pay creditors a set portion of your balances according to a three- to five-year repayment plan. This is less harmful to creditors when compared to a Chapter 7, and it stays on your report for seven years from the filing date.

Filing either type of bankruptcy doesn’t make any past due accounts disappear from your credit reports. The affected accounts get updated to show that they’re included in a bankruptcy, and remain on your credit reports for seven years. 

Free Resource: Credit Score Survival Kit – a multimedia tutorial with smart strategies to build and maintain excellent credit for life!

2. Civil judgment or lawsuit

If you have a delinquent debt, the creditor may file a lawsuit against you to try to collect what you owe. If you don’t respond or you lose the suit in court, a judgment is filed in the public records and it shows up on your credit reports.

If you have a delinquent debt, the creditor may file a lawsuit against you to try to collect what you owe. If you don’t respond or you lose the suit in court, a judgment is filed in the public records and it shows up on your credit reports.

Depending on your state’s laws, having a judgment against you allows creditors to take legal actions, such as garnishing your wages and seizing your bank accounts or other property to repay debt.

Typically, a judgment stays on your credit history for seven years from the filing date, even if you pay off the debt. However, some states, such as New York, have a shorter statute of limitations that may allow paid judgments to fall off your credit reports sooner.

3. Tax Lien

If you don’t pay taxes that you owe, such as property or income tax, the federal and state governments can place a tax lien on assets, such as your real estate, financial accounts, and personal property. Just like with a bankruptcy and judgment, a tax lien appears on your credit reports and has a seriously negative effect on your credit.

An unpaid tax lien can stay in your credit file indefinitely, but the timing depends on your state’s law. If you pay a tax lien, it gets released in the public records and stays on your credit reports for seven years.

4. Late payments

Having late payments on your credit reports is the most common type of damaging data. They’re typically recorded when you become 30 days past due, but it depends on the type of debt.

For example, if your credit card payment was due on January 1, but you didn’t pay it until the middle of February, your credit reports will include a 30-day late payment. Even if you catch up and pay the past due amount, that black mark stays in your file for seven years.

This is a disappointment to many who mistakenly let a payment due date slip through the cracks. What about just closing the account to redeem your credit? Nope, closed accounts with negative information stay on your credit report for seven years from your original delinquency date.

A special situation is getting behind on federal student loan payments. It’s not reported to the credit bureaus until you’re more than 90 days past due. However, if you miss payments for nine months, you’re considered in default and the entire unpaid balance of your loan, plus interest, becomes due immediately.

Not paying a federal loan is very serious for your credit and financial life. In addition to the acceleration of your balance, there are many negative consequences including losing the ability to choose a repayment plan, get a loan deferment, or qualify for additional student aid. Plus, your tax refunds, federal benefits, and a portion of your wages can be withheld to pay off a past due federal loan.

So always contact your federal loan servicer the moment you know that you can’t make a payment. They can help you choose the best option for your financial situation.

5. Charge off

If you’re seriously behind on paying a debt, such as over six months past due, a creditor may update the account status to a charge off. This is an accounting term that means a creditor gave up on trying to collect a debt and reclassified it from a receivable to a loss.

Having a charge off account means that’s it’s officially closed, but that you still owe the balance, and it stays on your credit report for seven years.

Having a charge off account means that’s it’s officially closed, but that you still owe the balance, and it stays on your credit report for seven years. If you pay it, the status changes to “paid charge off,” but remains for seven years from the original delinquency date.

Remember that your credit report is a living history that continues to show open and closed accounts for a set period. Having a charge off is considered negative, but it affects your credit scores less as time passes.

See also: 12 Credit Myths and Truths You Should Know

6. Collections

When a creditor charges off a debt, they typically don’t stop trying to collect it. The next step is to turn a past due account over to a collections agency that either buys it or gets paid a cut of what they collect.

Your account status changes to “in collections” or shows a transfer to a new creditor. Or you may see two entries on your credit report for the same account: one with the original creditor that shows a zero balance and one with the new creditor for the amount owed.

A collections account gets reported for seven years from your first delinquency date with the original creditor. As you can probably guess, even paying off an account in collections doesn’t make it vanish. It remains on your credit report for seven years, unless the law in your state requires a shorter period.

However, just like with other negative items, the more time passes after paying off a bad debt, the less it affects your credit scores. Having a paid collection account can be viewed more favorably than one you never paid.

In fact, some newer credit scoring models may exclude paid collections and medical bill collections in score calculations, even if they still appear on your credit reports. That makes it more likely to get approved for a large credit purchase, such as a home or car, even with medical bills or a paid collection in your past.

Some newer credit scoring models may exclude paid collections and medical bill collections in score calculations, even if they still appear on your credit reports.

7. Settlement

A settlement is an account that you agree to pay for less than the full amount owed. It’s not as negative for your credit as an unpaid account, but isn’t as good as paying as you originally agreed.

A settlement stays on your credit report for seven years from the reported date or seven years from the date the account first became delinquent. As with other negative items, a settled account hurts your credit less as it ages.

8. Voluntary surrender

If you take out a loan that’s secured by property, such as real estate or a vehicle, you agree that if you don’t pay the loan, the lender can take the asset to help repay your debt. But if you have a financial hardship and decide that you want to return the property to the lender, that’s called a voluntary surrender.

For example, some people would rather give back their car or boat instead of forcing the lender to pursue a repossession. Problem is, you typically still owe the debt, even if you return the property to your creditor.

If a lender can sell the property, their profit is typical less than what you owe. In that case, you’re still responsible for the difference, which is known as a deficiency balance. The lender may send the deficiency account to a collections agency. As I previously mentioned, a collection account is listed on your credit reports for seven years from the date you became past due with the original creditor.

And if the creditor goes a step further and takes legal action to collect the deficiency with a judgment against you, as I previously mentioned, it appears in the public records section of your credit reports for a maximum of seven years.

9. Foreclosure

If you’ve had many months of late payments on a home mortgage, your lender can use foreclosure to take ownership of your property to help repay your debt. Once proceedings begin, the account is updated to show a foreclosure status.

Like most negative items on your credit report, a foreclosure is listed for seven years from the original date you became past due. It has a significant negative effect on your credit scores during that time, even if you get caught up on loan payments.

Like most negative items on your credit report, a foreclosure is listed for seven years from the original date you became past due. It has a significant negative effect on your credit scores during that time, even if you get caught up on loan payments.

If you can’t pay a mortgage as agreed, doing a “short sale” may be slightly less harmful for your credit. A short sale of real estate is when you sell it for less than you owe, with the lender’s approval. However, a lender may still hold you responsible for a deficiency balance.

If you negotiate a short settlement, where a mortgage lender agrees to accept less than the original amount owed, it’s shown on your credit report as “settled” for seven years.

How Negative Items Are Removed from Credit Reports

Once the reporting period for a credit account or a public record item has expired, the credit bureau automatically deletes if from your file. You don’t need to submit a request for it to be removed, but it’s a good idea to double check by pulling a copy of your credit reports.

You may be wondering if you can negotiate with a creditor or collections agency to remove a negative (but accurate) item faster. In most cases, this is against their agreement with the credit bureaus to report accurate and complete data about you.

While it doesn’t hurt to ask for negative information to be deleted as part of a debt settlement, it doesn’t typically happen unless there are extenuating circumstances, such as a billing error.

To sum up, just about every negative item on a credit report remains there for seven years. The exceptions are a Chapter 7 bankruptcy which remains for 10 years, and an unpaid tax lien which can stay 10 years or longer, depending on the laws in the state where you live.

So, do everything in your power to keep black marks off your credit history in the first place and protect your credit.

Get More Money Girl!

If you set a resolution to get out of debt this year, awesome! Now it's time to actually learn how to do it. Don't miss Laura's new online class Get Out of Debt Fast--A Proven Plan to Stay Debt-Free Forever. Enroll with an 85% discount for a limited time when you click here to learn more!

If you're ready for help managing debt, building credit, and reaching big financial goals, check out Laura's private Facebook Group, Dominate Your Dollars! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.

To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

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Daily habits lay the foundation for short- and long-term success with our health, wealth, and happiness, so it’s critical to carefully examine our repetitive behaviors and thought patterns. They’re either moving you closer to your goals or further away from them.

I’ll admit that breaking old habits and forming new, beneficial ones isn’t easy. But one way to create more financial success is to begin layering simple micro habits into your routine that require minimal effort and motivation to complete.

You already have many tiny daily habits, such as brushing your teeth or taking vitamins. Any small step that allows you to stop a negative habit or start a positive one is a micro habit.

They take up little time, but can build up to huge, significant results when you make them part of your routine.

7 Micro Habits That Create Financial Success
  1. Listening to 15 minutes of audio.
  2. Reading one page of a book.
  3. Going to bed 30 minutes earlier.
  4. Buying quality instead of quantity.
  5. Setting a spending waiting period.
  6. Automating your savings.
  7. Saying “no” more often.

Here's how to use these seven micro habits to create more professional and personal financial success.   

1. Listening to 15 minutes of audio.

Everyone has 15 minutes of daily downtime, such as when you get dressed, shave, put on makeup, fold clothes, take a lunch break, or commute. That’s the perfect opportunity to listen to a great podcast or audiobook that improves your life.

No matter if you’re an employee or have a business or side gig, find audio content about your industry so you can stay up-to-date. Or seek topics like customer service, e-commerce, or marketing to find more customers and serve clients at a higher level. Choose anything you want to start doing better and find expert content that moves you forward with information and motivation.

When you surround yourself with positive information, it’s easier to stay informed and inspired. You never know where the information may take you.

The beauty of podcasts and audiobooks is that you can consume portions when you have small windows of time and then pick up where you left off. Start by listening to something new that interests you for just 15 minutes and see how you can incorporate it into your day on a regular basis.

When you surround yourself with positive information, it’s easier to stay informed and inspired. You never know where the information may take you. Listening is a fun way to make small, incremental life changes that make you a little bit better every day.

2. Reading one page of a book.

With so much digital and social media fighting for our attention, making time to read physical books can seem daunting. But reading the old-fashioned way has so many benefits that you don’t get from reading on a device. 

Research suggests that reading electronic text can slow you down by 20% to 30% compared to the speed you read a real book. Feeling the paper and flipping pages creates a deeper sensory experience that helps reading comprehension and remembering what you read.  

Create a micro habit to read just one book page a day. While this might seem like a ridiculously tiny goal, that’s the point. If you read one page, it’s likely that you’ll read several—but it’s okay if you don’t. Taking a long time to read a book is better than not reading one at all.

Build this micro habit into your early morning or nighttime routine. I love snuggling up with a good book to relax before going to sleep. Getting engrossed in a great book can help you learn, reduce stress, and be a signal to your brain that it’s time to wind down.

Consider alternating between fiction and nonfiction to round out your reading. To improve your finances, here are five book recommendations:

3. Going to bed 30 minutes earlier.

Your health lays the foundation for what you can achieve with your money and life. If you’re not taking care of your body, your mind will also suffer. In addition to maintaining a good diet and regular exercise, try going to bed 30 minutes earlier.

Your health lays the foundation for what you can achieve with your money and life. If you’re not taking care of your body, your mind will also suffer.

That extra time might allow you to read a book before drifting off or get a better night’s sleep. I love watching TV with my husband after dinner, but I try to set a limit of one hour or two. As fun as it can be to stay up late watching your favorite TV shows, it’s probably not helping you achieve your goals.

Instead, begin your bedtime routine a little earlier so you can wake up feeling recharged, focused, and able to accomplish more. You only have one life, so don’t make a habit of wasting time.   

4. Buying quality instead of quantity.

One micro habit to pare down your possessions and enjoy them more is to buy less stuff, but choose higher quality items. It’s easy to fall into the trap of buying lots of clothes, shoes, or home furnishings because they’re on sale or seem like an irresistible “bargain” in the moment.

I love a sale as much as the next person, but I find that when I buy higher quality items, I cherish and take better care of them than I do for cheap stuff. I use a “one in, one out” rule that forces me to sacrifice a similar item when I buy something new.

For example, if I buy running shoes, I need to sacrifice an old pair. Got a new top or pair of jeans? I must pick one that I haven’t worn in the past year to donate to Goodwill.

Sometimes I push myself to get rid of two items for each one that I add to my clothes closet, kitchen, or book shelves to make sure I’m slowly cutting down, instead of accumulating. This is more of a mindset shift than a daily habit, but can really transform the way you spend money on material possessions.

5. Setting a spending waiting period.

In addition to buying less, creating a rule that you must wait a minimum of 24 hours before buying anything over a certain amount, such as $50 or $100, is a key micro habit for financial success. By “sleeping on it,” you decide with a clear mind if buying a discretionary item is a need, or just a random impulse purchase. Often, you’ll have a change of heart and realize you didn’t need or want it anyway.

In addition to buying less, creating a rule that you must wait a minimum of 24 hours before buying anything over a certain amount, such as $50 or $100, is a key micro habit for financial success.

If you’re shopping in a brick and mortar store and find something you want over your price limit, take a picture of it and its price. You can revisit the item at least 24 hours later and even take the time to do comparison shopping online.

I also recommend calculating what an item costs you in time. Here’s a shortcut to convert your annual income into an hourly rate: If you earn $50,000 a year, shorten it to $50, then take half, which equals $25 per hour. So, if a new pair of boots cost $250, earning $25 per hour means they’d cost you 10 hours of work—before taxes.

Are new boots worth the equivalent of a long workday? Only you can decide. Doing time value calculations and waiting 24 hours are micro habits that can instantly reframe how you think about making a purchase.

6. Automating your savings.

A micro habit that you can put on autopilot is automating savings and investments. The idea is that what you don’t see in your bank account, you can’t spend.

That’s why workplace retirement plans with automatic payroll deductions, such as 401ks or 403bs, work so well. So, contribute as much as you can at work, or create a recurring transfer to move money from your checking to an IRA or bank savings account, as soon as you’re paid.

It’s OK to start small. Even investing $50 a month is better than nothing. If you invested that much for 40 years and earned a conservative 6% return, you’d have $100,000.

Creating your accounts and setting the savings automation infrastructure is what’s most important to build wealth and move your finances in a positive direction.

See also: 8 Financial Truths That Can Change Your Life

7. Saying “no” more often.

Saying “no” to negative people or invitations that don’t align with your goals is a wise micro habit to develop. It can be much harder to do the right things when you’re around other people’s drama and conflicts.

The people you surround yourself with have a major influence over who you become. So, don’t let negative influences penetrate your mind. Stay true to who you are and what you want to accomplish.

Instead of acting unconsciously and being jerked around by unproductive impulses, use these tiny habits to ease into a new world of positive behaviors and outcomes.

Get More Money Girl!

If you set a resolution to get out of debt this year, awesome! Now it's time to actually learn how to do it. Don't miss Laura's new online class Get Out of Debt Fast--A Proven Plan to Stay Debt-Free Forever. Enroll with an 85% discount for a limited time when you click here to learn more!

If you're ready for help managing debt, building credit, and reaching big financial goals, check out Laura's private Facebook Group, Dominate Your Dollars! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.

To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

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Understanding how retirement accounts work and using them the right way can make the difference between having a secure future or just scraping by, after you stop working. They have powerful benefits, such as cutting taxes, automating contributions, and even receiving additional matching funds from an employer.

Problem is, retirement accounts are loaded with strict rules, which can be confusing and keep you from managing them properly. Rollovers are an often-misunderstood way to avoid taxes and penalties when you need to move money from one account to another, such as after leaving a job.

Even though “doing a rollover” sounds like a cute dog trick, don’t underestimate its ability to save you some serious money on taxes. A tax-deferred rollover occurs when you withdraw cash from one retirement account and contribute it to another account within 60 days.

When handled correctly, doing a rollover is the best way to move money between retirement accounts. But when mishandled, taking money out of a retirement plan can be expensive.

When handled correctly, doing a rollover is the best way to move money between retirement accounts. But when mishandled, taking money out of a retirement plan can be expensive.

In this article, I’ll answer 10 common questions about how to use a retirement rollover correctly. You’ll learn how to avoid paying tax penalties, get more investment options, and continue building your retirement nest egg when you need to change accounts.

Question #1: What is a retirement rollover?

Answer: As I previously mentioned, a rollover is when you move some or all your money in one retirement account to another retirement account, without incurring a tax penalty. Investments in the old account are sold and then you invest the proceeds in the new account by choosing from its menu of available options.

Withdrawing funds from a retirement account, without doing a rollover, typically causes you to pay income tax plus a 10% early withdrawal penalty, if you’re younger than age 59½. So, a rollover gives you a way to move your retirement funds without triggering an expensive, taxable event.

The most common reason to rollover retirement money is after you leave a job with a retirement plan, such as a 401k or 403b. If you don’t want to leave the funds with an ex-employer, you can move them into an IRA (Individual Retirement Arrangement) that you own as an individual.  

Even though it’s different than a 401(k), doing a rollover to an IRA within 60 days doesn’t trigger income tax or a penalty. Your new earnings in the account will grow tax-deferred, just like they did in your old workplace plan.

Question #2: How do you do a retirement rollover?

Answer: Let’s say you plan to leave a job with a 401k and want to move your funds to a traditional IRA. As soon as your employment ends, there are three simple steps to complete a rollover:

  1. Open a new traditional IRA, if you don’t already have one 
  2. Send a transfer request to your 401k
  3. Choose investments for your new IRA funds

You can download a rollover request form from your online retirement account, or get one from your account custodian or the benefits administrator at work. Depending on the institution, you may have the option for funds to be sent electronically, known as a trustee-to-trustee transfer or rollover. This is the best option because you never touch the funds.

The second-best option is called a direct rollover, which is when you receive a paper check made payable to your new account. You’re responsible for forwarding it to your new institution within a strict 60-day deadline.

If you don’t contribute all the funds to a new retirement account within 60 days (including weekends and holidays), it’s considered an early withdrawal, subject to income tax plus a 10% penalty, if you’re younger than age 59½.

There’s a third option for receiving a rollover distribution that I don’t recommend: having a check made payable to you. When you receive retirement funds in your name, there’s a mandatory 20% withholding penalty applied—even if you intend to complete a rollover. This is a safeguard for the IRS, just in case you change your mind and decide to keep the cash.

For example, if you want to roll over $10,000 from your 401(k), the custodian withholds 20% for taxes and you’d only get a check made payable to you for $8,000. If you complete the rollover, you eventually receive a refund for the withholding when you file taxes.

But that could be many months away and you lose the ability to earn potential investment gains every day that you don’t control those funds. So, remember that a trustee transfer or a direct rollover is the best for your wallet.

Question #3: Can I do a retirement rollover before leaving a job?

Answer: You may have the option to take a hardship withdrawal or a loan from your workplace retirement plan while you’re still employed. Some plans may also allow for “in service” withdrawals if you’re over age 59½. But in general, you can’t do a rollover until after you leave the company, become disabled, or retire.

Question #4: Do I have to do a retirement rollover if I leave a job?

Answer: You don’t have to rollover retirement funds from an old job, but it’s typically the best choice. Here are the three other options:

  1. Leave funds in your former employer’s plan, if allowed
  2. Rollover funds to another employer’s plan, if allowed
  3. Cash out

Even if your old employer allows you to keep funds in their retirement plan, there’s typically a minimum balance requirement, such as $5,000, and you’re prohibited from making any new contributions. But you can manage the funds as you wish by reallocating investments and enjoying their tax-advantaged status and growth potential.

The final option for your old retirement account, cashing out, is the easiest, but worst one for your financial future.

If you go to work for another company that offers a retirement plan, most allow rollovers from another plan (but not from an IRA). This option gives you the same tax advantages and consolidates funds into one account.

The final option for your old retirement account—cashing out—is the easiest, but worst one for your financial future. As I previously mentioned, you’ll owe income tax plus an early withdrawal penalty when you’re younger than age 59½. You also give up huge amounts of potential growth and security for retirement.

Let’s say you have a balance in the account of $100,000 and decide to cash out. If you must pay 40% for federal and state tax, plus an additional 10% penalty, you lose 50%. Your $100,000 nest egg just shrunk to $50,000 in one fell swoop.

Before deciding what to do with an old workplace retirement plan, consider factors including account fees and expenses, investment choices, services offered, and the treatment of any employer stock you have. Using an IRA usually gives you many more investment choices, but may charge higher costs for certain funds compared to an employer-sponsored plan. Just be sure to choose low-cost investing funds to keep a lid on fees.

One benefit of keeping funds in a workplace plan is the legal protection provided by the Employee Retirement Income Security Act (ERISA). It gives protection from creditors, except the federal government.

That means if you got into financial trouble and couldn’t pay a creditor, they could sue you, but couldn’t take your 401k or 403b funds to repay your debt. Whether creditors can touch some or all of your retirement money in an IRA varies from state to state. So, if protecting your retirement from creditors is a concern for you, be sure to ask your existing or potential new IRA custodian about your state’s regulations.

Question #5: Can I rollover a 401k into a Roth IRA?

Answer: Since traditional retirement contributions are made on a pre-tax basis and Roth contributions are after-tax, you can only roll over workplace accounts into like accounts without triggering a tax consequence. For instance, you can roll over a traditional 401k into a traditional IRA and a Roth 401k into a Roth IRA.

Moving money from a traditional workplace account into a Roth IRA would be considered a Roth conversion, making you responsible for income tax on any amounts that weren’t previously taxed. So, I generally don’t recommend doing a Roth conversion because it can result in a huge tax liability.

Question #6: Can I combine my rollover and new contributions in the same IRA?

Answer: If you open a new IRA to facilitate a rollover, you can always add new contributions or use it for additional rollovers. If you already have an existing IRA, you can use it for a rollover, if it’s a like (traditional to traditional and Roth to Roth) account, as I mentioned earlier.

For 2018, you can contribute up to $5,500, or $6,500 if you’re over age 50 to either a traditional IRA, a Roth IRA, or to a combination of the two. Your rollover funds don’t count toward the annual IRA contribution limits.

Question #7: How often can you do a retirement rollover?

Answer: The only rollover restriction is when you move money from one IRA to another IRA, which you can only do once per year. There are no restrictions on how often you can do:

  • Rollovers from a workplace plan to an IRA
  • Rollovers from a workplace plan to another plan
  • Rollovers from a traditional IRA to a Roth IRA, known as a Roth conversion
  • Trustee-to-trustee transfers from one IRA to another IRA

So, if you request a trustee-to-trustee transfer or a direct rollover, where funds are never put in your name, there’s no limit to how often you can rollover your money.

Question #8: Do I have to report a rollover on my taxes?

Answer: When you complete a timely rollover, you’ll receive two tax forms at the end of the year. Form 1099-R shows that you took a distribution from a retirement plan and Form 5498 reports that you made a rollover contribution.

Even if no portion of your rollover is taxable, you’ll need to submit these forms with your tax return.

Question #9: Can I do a Roth rollover if I earn more than the annual limit?

Answer: Doing a retirement rollover is different than making an account contribution. So, the annual income thresholds that make high-earners ineligible to contribute to a Roth IRA don’t apply for rollovers.

For 2018, married couples filing taxes jointly are prohibited from making Roth IRA contributions when their modified adjusted gross income exceeds $199,000. Singles and heads of household who earn more than $135,000 are also ineligible.

Question #10: Can I rollover a 401k with pre- and post-tax money in it?

Answer: Most traditional workplace plans give you the option to make pre- and post-tax contributions. This might be a good idea if you max out a 401k or 403b, but still have more to invest. You would have to make the additional contributions on an after-tax basis.  

You can roll over a mixed workplace plan to a traditional IRA, with the after-tax portion getting designated as non-deductible contributions. Or you could rollover the after-tax portion into a Roth IRA without triggering any tax consequences.

If you choose to maintain non-deductible contributions in a traditional IRA, make sure you report it properly using Form 8606 and discuss it with the account custodian. It’s important to keep track of the after-tax amount so you don’t pay tax on it twice when you take distributions in retirement.

The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options.

What’s the Best Place for Your Retirement Rollover?

To sum up, the best place for your old retirement account depends on the flexibility and legal protections you want, the quality of your old plan, your income, and whether you have a new retirement plan that accepts rollovers. The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options.

If you have questions about doing a rollover, go straight to your retirement plan custodian for advice. They can walk you through the process to make sure you don’t break the rules and end up with a botched rollover.

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To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

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Hey everyone, I’m Laura Adams and this is the Money Girl podcast, where my mission is to live rich and love the journey.

Today I want to introduce you to a new show coming to you from Wondery called Safe For Work, hosted by Liz Dolan and Matt Ritter. Part of loving the journey along the way to financial success is fulfillment from our day to day work. It’s difficult to stay positive if we don't have a productive work environment. How do we maintain positive business relationships and reach our ultimate goals? It is challenging and at times overwhelming to stay on the right track. How do you navigate some of those tricky situations that come up or make difficult choices about a job change? On Safe For Work, Liz and Matt will take calls from listeners helping them solve problems like these that they are facing, giving advice and sharing their experience and expertise.

You can listen to this clip from the first episode here, and if you love it, go ahead and subscribe wherever you get your podcasts. Enjoy! 

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Working from home, either as a remote employee or for your own business, has become common. Companies and those who are self-employed can drastically cut overhead when they don’t have to pay for office space. And most employees love skipping the daily grind of commuting and having flexibility for when and where they work.

Another huge benefit of working from home is claiming money-saving tax deductions. But beginning with the 2018 tax year, fewer taxpayers will be eligible for home office deductions under the new Tax Cuts and Jobs Act.

In this post, you’ll learn what tax reform did and didn’t change about claiming a deduction when you work from home.  

Beginning with the 2018 tax year, fewer taxpayers will be eligible for a home office deduction under the new Tax Cuts and Jobs Act.

Home Office Tax Deduction Changes for Employees

Getting a tax deduction for a home office is treated differently depending on whether you work for yourself or for someone else. Let’s start with how tax reform affects deductions for W2 employees.

Beginning in 2018, employees are no longer eligible to deduct unreimbursed job expenses, including the cost of a home office. So, if you’ve grown accustomed to writing off a variety of expenses related to your job, it’s time to kiss them goodbye. (You can still claim valid expenses on Schedule A for your 2017 tax return, so don’t miss out on deductions that were legal before tax reform began.)

Prior to the Tax Cuts and Jobs Act, workers could deduct job expenses that weren’t reimbursed by their employers. You couldn’t deduct all of them, but you could claim a total that added up to more than 2% of your adjusted gross income.

Deductible expenses included any “ordinary and necessary” cost to do your job or improve your job skills, such as:

  • Subscribing to a trade magazine
  • Attending an industry conference
  • Buying protective clothing
  • Paying union dues
  • Buying your own tools
  • Driving your vehicle
  • Paying for travel, lodging, and meals
  • Working with an employment agency to find a new job
  • Using any part of your home for your work

These are just a few examples from a long list of eligible expenses that, under the old tax rules, employees could deduct when they shelled out for them, but weren’t reimbursed. Any expense that helped you do your job, including the cost of maintaining a home office, was fair game for a deduction.

Unless employers choose to reimburse workers for these common costs, the elimination of this deduction is a big blow to employees with job-related expenses. For example, if you earned $100,000 and had $5,000 in unreimbursed job expenses, you could deduct $3,000 (the amount over 2% of income). If you paid an average tax rate of 20%, that deduction would have saved you $600 in taxes.

While it’s true that the standard deduction under tax reform has nearly doubled to $12,000 for singles and $24,000 for joint filers, if you’re an employee who pays a significant amount of job-related expenses out of pocket, you may not come out ahead. Consider asking your company for ways to offset the costs you pay to be successful in your job—especially if you maintain a home office for their convenience.

How Businesses Can Use the Home Office Tax Deduction 

The good news is that if you’re self-employed or run a business from home, tax reform didn’t change your ability to deduct home office expenses against your business income.

Now, let’s switch gears and cover claiming a home office deduction when you work for yourself.

The good news is that if you’re self-employed or run a business from home, tax reform didn’t change your ability to deduct home office expenses against your business income. You can still claim the costs of a home office as business expenses, using Schedule C.

So, the only taxpayers affected are employees who work from home, not business owners and those who are self-employed. However, the same strict limitations on who can claim a home office deduction still exist.  

See also: 5 Steps to Create Your Own Self Employed Benefits Package

Who Can Claim the Home Office Deduction

I received a question on this topic from Sandy N., who says, “I have a part-time business selling on eBay. I work at home and store all my inventory there, but in different rooms. Do I qualify for the home office deduction? If so, how would I calculate it and do I need a tax ID number?”

Thanks for your question, Sandy. You don’t need a tax ID number to have a business or to claim valid tax deductions. If you use part of your home exclusively and regularly to conduct your business, even on a part-time basis, you’re qualified to deduct home office expenses.

You can include both the space you use for work plus your inventory storage spaces in your deduction calculation. You can even take a home office deduction if you work in other locations occasionally, such as meeting people in a coffee shop or visiting businesses. You can claim a home office no matter if you own your home or rent.

See also: 6 Tips to Find Affordable Health Insurance When You Become Self Employed

How to Calculate the Home Office Deduction

The deduction amount you can claim depends on the type of calculation method you use and the types of expenses you have.

The deduction amount you can claim depends on the type of calculation method you use and the types of expenses you have. There are two ways you can claim a home office deduction. If you’re not sure which home office method is best, try both to find which one saves you the most in taxes.

  1. Standard method: This method requires you to determine the percentage of your home that’s used for business. Measure the total square footage of your home and the total square footage of your work areas. Then divide the business area by the size of your entire home. For example, if your home or apartment is 2,000 square feet and 400 of it is your work and storage areas, you could deduct 20% of your expenses.

This method requires you to keep detailed records of all your expenses. You use Form 8829 to figure out the expenses you can deduct, complete Schedule C, and submit both forms when you file taxes.

  1. Simplified method: This method gives you a flat rate to deduct that’s much easier to calculate than the standard method. You’re allowed to deduct $5 per square foot of your home office areas.​

Problem is, the simplified method is capped at 300 square feet, which limits the deduction to $1,500. So, if the business areas in your home are larger than 300 square feet, or your deduction would add up to more than $1,500, you’ll come out ahead using the standard method. Detailed records aren’t required; just measure the spaces in your home that are used for business and include the calculation on Schedule C.

Which Home Office Expenses Are Deductible

You’re probably wondering which home office expenses you can deduct if you choose to use the standard method. There are a variety of personal expenses that legitimately become deductible when you operate a business from home.

There are a variety of personal expenses that legitimately become deductible when you operate a business from home.

As I mentioned, maintaining records for the standard method is more of a hassle than using the $5 per square foot, simplified method, but may get you a larger deduction.

When claiming the standard home office deduction, you need to keep track of these two types of expenses:

  • Direct expenses: These are for your office only. Let’s say you start a side business like web design or selling items on eBay, like Sandy. If you create an office in your spare bedroom and paint the room, install carpet, and install window treatments, these direct expenses are 100% deductible, no matter the size of the office.    
  • Indirect expenses: These are for your entire home. You’d have these expenses even if you didn’t have a home office. They’re partially deductible based on the size of your office as a percentage of your home. They might include mortgage interest payments, property taxes, rent, insurance, maintenance, cleaning, utilities, garbage disposal, and a security system. So, if your rent, insurance, and utilities total $2,000, and 20% of your home qualifies for business use, $400 of your monthly bills would be deductible.
Tips for Homeowners With Home Offices

If you’re a homeowner, taking the home office deduction gets a little more complicated because only a portion of your mortgage payment is deductible. You can't deduct the principal portion, which is the amount you borrowed for the home. Instead, you’re allowed to recover a portion of the cost each year through depreciation deductions, using formulas created by the IRS. You can claim mortgage interest, real estate taxes, home insurance, and depreciation, as indirect home office expenses. 

If you’re a homeowner, taking the home office deduction gets a little more complicated because only a portion of your mortgage payment is deductible.

Even if you don’t use your home for business, you can claim the mortgage interest deduction, which allows you to claim qualified mortgage interest and real estate taxes, if you itemize deductions on Schedule A. However, claiming these as part of the home office deduction can save you more in taxes because you shift them from an itemized deduction to a more valuable business expenses deduction.  

For expenses that are completely unrelated to your home office—such as remodeling in other parts of your home or the addition of a pool—they’re never deductible. And you typically can’t deduct exterior expenses like yard work or gardening, even when you regularly see clients or vendors where you live.

See also: 5 Retirement Options When You're Self-Employed

Deducting Business Expenses

Also note that costs pertaining to your business, which have nothing to do with your home office—such as buying business insurance, a computer, and office supplies—are fully deductible as ordinary business expenses. They’re 100% deductible no matter where you run your business or work when you’re self-employed.

So, how you deduct an expense and how much depends on whether it benefits the entire home (such as electricity and water), just your office portion of the home (such as painting that area), or just your business (such as a computer or software).

But note that you can’t deduct more expenses than the amount of your business’ gross income. If your income from the business is less than your expenses, your deduction for certain home office expenses will be limited, but you may be able to carry over the excess to the next tax year.

You can probably tell that the rules for claiming tax deduction on your home office and business can be complicated. You can refer to IRS Publication 587 for more details. But my best advice is to consult with a qualified tax accountant to help you save the most money possible when you’re working from home.

See also: How to Create a Profitable Side Business (and Keep Your Day Job)

Get More Money Girl!

If you set a resolution to get out of debt this year, awesome! Now it's time to actually learn how to do it. Don't miss Laura's new online class Get Out of Debt Fast--A Proven Plan to Stay Debt-Free Forever. Enroll with an 85% discount for a limited time when you click here to learn more!

If you're ready for help managing debt, building credit, and reaching big financial goals, check out Laura's private Facebook Group, Dominate Your Dollars! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.

To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

Interior of Home Office image courtesy of Shutterstock

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