Retirement Savings Contribution Credit (Savers Credit)

For anyone who has made a contribution to a retirement account in 2015 or is considering contributing in 2016, you might be eligible for an additional tax credit. The Retirement Savings Contribution Credit, also known as the Savers Credit, is a special tax break to low and moderate income taxpayers who are saving for retirement. This credit, in addition to other tax benefits for saving for retirement, can reduce or even eliminate your tax bill if you qualify.

Interestingly enough, a recent survey showed that only 12% of American workers with annual incomes of less than $50,000 are aware of the Savers Credit. In other words, the population that should know about this Savers Credit the most is under-informed. With hopes of raising awareness and equipping savers on how they could potentially pay less in taxes, see below for a brief Q&A on the Savers Credit on how it works and what you should know.

How much could the Savers Credit cut from my tax bill?

You can claim the credit for the 50%, 20%, or 10% of the first $2,000 you contribute to a retirement account depending on your adjusted gross income and tax filing status. Note that the largest credit amount a married couple filing jointly can claim together is $2,000 and the credit is a “non-refundable” credit. This means that the credit can reduce the taxes you owe down to zero, but it can’t provide you with a tax refund.

What retirement accounts qualify?

The Savers Credit can be claimed for your contributions to a 401(k), 403(b), and 457 plan, Simple IRA, Traditional IRA, and ROTH IRA. Note that you cannot claim any employer contributions to employer sponsored retirement accounts.

Am I eligible?

In order to claim a Savers Credit you must be:

• Age 18 or older

• Not a full-time student

• Not claimed as a dependent on another person’s return

Additionally you must meet the necessary income requirements. In 2015 the maximum adjusted gross income for the Savers Credit is $61,000 for a married couple filing jointly, $45,750 for head of household, and $30,000 for all other filers. The maximum credit you can claim phases out as your income increases. See the below table that outlines how much you can claim and at what income levels:

2015 Saver's Credit Credit Rate Married Filing Jointly Head of Household All Other Filers 50% of your contribution AGI not more than $36,500 AGI not more than $27,375 AGI not more than $18,250 20% of your contribution $36,501 - $39,500 $27,376 - $29,625 $18,251 - $19,750 10% of your contribution $39,501 - $61,000 $29,626 - $45,750 $19,751 - $30,500 0% of your contribution more than $61,000 more than $45,750 more than $30,500

This information can also be seen at on the IRS website. If you are eligible use the Form 8880 to claim your credit and other best practices.

Example:

Dan and Kailey are married and file jointly. He contributed $1,000 to his 401(k) and she contributed $500 to an IRA. Their 2015 combined AGI is $35,000. Therefore, each of them is eligible to claim a 50% credit for their contributions and together their credits are worth $750.

If you have questions on if you are eligible for the Savers Credit feel free to email or call us and we would be happy to walk you through this blog post in more detail and how you can best take advantage of this credit.

*Please note that Human Investing does not provide tax advice/guidance and you should contact your CPA with specific tax related questions.

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401k’s are purposed for long-term retirement savings; for what comes after the working years. They are arguably our best means of influencing our financial futures – through diligent, faithful saving. Still, life happens. And what’s ideal doesn’t always copy and paste perfectly onto each of our own realities. Thus, there are sometimes¹ allowances that permit 401k participants to borrow dollars from their current accounts in the form of a loan. Though borrowing from a 401k is not the intended use of the account, we aren’t saying they’re always the worst option. What we are saying is that 401k loans are worth thinking twice about. And in my experience, there are a few points that consistently surprise people.

For example, do you know what would happen if you stopped working with a company while you had an outstanding 401k loan? In many cases, you’re left with two options:

1. Pay back the loan in cash within approximately 60 days

2. Default on the loan, and pay taxes and any applicable penalties on what’s owed

So, especially if you’re considering taking out a larger sum, it’s important to know the implications of what taking a loan means for both the short and the long term. See below for some more thoughts…

¹401k loans are not available through all 401k Plans, and the logistics of how they work and when they’re allowed can differ between Plans. With questions, call Human Investing at 503-905-3100 or email 401k@humaninvesting.com.

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During my time leading our participant education efforts for the retirement plans we manage, I’ve received all kinds of questions. Questions ranging from, “How do I start a 401k?” to “What’s the best way to consolidate my student loans?” However, a question I’ve gotten more frequently is:

“If I have the ability to save more, should I pay off my mortgage or should I put more towards retirement saving?”

I feel like this question has been on people’s minds as our economy has made a nice recovery since 2008. For people I’ve talked with, the question has come up due to a change in financial circumstances such as; an inheritance or some form of windfall, the sale of a home, or a recent bonus. Regardless of the circumstances, these individuals have been sitting on this money in low interest rate saving accounts and are looking for ways to have their money work harder for them. While there is no all-inclusive answer, I’ll do my best to outline some of the pros and cons of paying off your mortgage/making additional payments or saving more toward your retirement account.

Your home.

You will not change the value of your home by contributing more to the mortgage, or even paying it off. If your house is worth $350k, it’s always going to be worth $350k until the market determines otherwise. When you put more money into paying off your house, it’s not doing anything to change the value of the house…you’re basically putting money into an illiquid asset that you can only access when you sell the home or take a HELOC.

Additionally, your house is most likely financed at a low/tax-deductible interest rate. Your interest rate might be in the 4.5% ballpark. With your tax deduction, you’re most likely paying a real interest rate of 3% to 3.5%. That’s pretty cheap money. If interest rates were much higher (like in the 8% to 9% range), then it would be a different story and paying off your mortgage might make more sense.

Investing.

When putting money into a long-term retirement account and investing appropriately, you’re building an asset that can grow at 9% per year, using the S&P 500 as a benchmark, over a long period of time. By putting money in, you’re actually giving those dollars the ability to grow over the years. Unlike putting money into your mortgage, your deferrals will directly affect the type of return and the growth of that account over time. So, the more you put in, the more you will get out in the end.

Example: Keep in mind that nothing you do, except making updates to your home, will increase the value of it. Compare that with an investment/retirement account. Let’s assume there are two different people…one has been putting a fair amount of savings in their retirement account, the other has contributed a much smaller amount. For the sake of the example, let’s call them Kelly and Chip.

Kelly has a $110k account. Chip has a $10k account. It’s 2014 and they are both invested in the Vanguard Target Retirement 2040 fund. The return on that fund in 2014 was 7.15%.

So, to start 2015 and without additional savings, Kelly now has an account worth $117,865 and has gained $7,865 just on return alone. Chip now has an account worth $10,715 and has gained $715 on return alone. Both are good, but Kelly is setting herself up to have a suitable retirement account. By the way, if we assume that neither Kelly or Chip contribute another dollar to this account forever, in the year 2040 (assuming an average 7% rate of return per year) Kelly will have an account value of about $640k, while Chip will have an account worth about $58k. That’s a huge difference! Personally, I’ll take the investment accounts over paying off my mortgage a few years earlier.

Regardless of your views on this specific question, know that if you’re wrestling with anything retirement account related feel free to reach out by phone at 503.905.3100 or email 401k@humaninvesting.com anytime. We would love to connect with you!

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Chances are you drink coffee. I know I do...almost every day. It’s a habit that gets a hold of us somewhere early in our careers and it’s a hard one to kick. In fact, according to the Harvard School of Public Health, 54% of Americans over the age of 18 are coffee drinkers…that’s about 131 million people. According to the same study, Americans spend about $40 billion a year on coffee. That’ll wake you up! (horrible pun, I know). And I bet that if you’re reading this blog article, that means that you most likely fall into the demographic of “coffee drinker”…responsible, working, informed adult…those characteristics generally equal “coffee drinker”.

The Cost Today

So what does our coffee habit cost us? For this exercise, let’s assume that we buy one cup of coffee per working day and that (coffee/americano/latte/mocha [insert drink of choice here]) costs us $2.50, but really it’s $3 because we tip the friendly barista who conveniently works somewhere along the path of our morning commute. Let’s also throw in one weekend coffee for good measure. Do the math and that’s $18 per week, roughly $78 per month and $936 a year. So to answer the question “how much does our coffee habit cost us?”… on average about $1,000 per year.

The Real Cost

But if we dive a little deeper, how much is our coffee habit really costing us? To answer this, we need to think more long-term beyond our initial caffeine cravings. There’s a term we use in finance called “Opportunity Cost” that refers to the potential value of our money if we use it in a different way. So instead of buying coffee, what if we took that $1,000 per year and applied it to our long-term retirement savings? Exciting, I know.

Investing your coffee money for retirement: Let’s assume we’re 40 years old and will work until we're 65 years old, in other words, we have 25 years left until retirement. Let’s also assume that the $1,000 per year of forgone coffee is invested in our 401k account in a way that averages an annual growth rate of 9% per year. That 9% rate of return per year is an average of course, since the stock market is variable from year-to-year and is certainly unpredictable in the short-term. With that being said 9% per year is a fair average if you’re invested in stocks for 25 years.

Summary: 25 years, $1,000 per year, invested in a way to receive 9% per year (primarily US stocks)

At 65, our coffee money will be worth about $85,000. That means that our coffee habit is really costing us about $60,000 ($85,000 minus $25,000). To make it more impactful, the actual cost of a cup of coffee today is not $3…it’s almost $11 ($85,000 divided by 312 cups per year). That means that every cup of coffee you buy today could cost you almost 3 times what you think it does. That better be a good cup of coffee.

Lastly, factor in a matching contribution from your company and your $85,000 could be worth up to $130,000. Still using a cup of coffee as our currency, that is $16 per cup!

How to Respond

Since we now know our coffee is really costing us $11 or $16 per cup, we’re giving up a lot down the road to feed our habit today. I’m not suggesting to change a coffee habit, but rather a spending habit

The video below outlines a few tips I’ve learned over the years to make a great cup of coffee at home and still capture the morning glory that a cup of coffee brings without the cost of a coffee shop.

Disclaimer: I’m neither a barista nor an actor so bear with me and enjoy!

https://www.youtube.com/watch?v=i7Dsy4-ZqZk

French Press instructions:

1. Find a local coffee brewer and buy a 16oz bag of their coffee beans pre-ground to French Press (coarse grind)

2. Make sure you have a french press maker on hand. If you love coffee, this should be a mainstay in your morning routine.

3. Put about a half of an inch to an inch high's worth of your local course ground coffee into the bottom of the french press beacon

4. Using your tea pot, bring about 30 ounces or more of water to a boil on your stove top

5. Once the water has come to a boil, remove the tea pot from the oven burner and let it rest for about 30 seconds

6. Once the water has rested and come down from the boil, pour it into the French Press beacon making sure you douse all of the coffee grounds as you pour it in. Pour the water to the top of the French Press, or the desired amount of coffee.

7. Stir (aggravate) the grounds/water with a spoon

8. Put the French Press Plunger on top to hold in heat and let it sit for 4 to 5 minutes

9. Once 4 or 5 minutes have passed, slowly press the Plunger to the bottom of the French Press Beacon.

10. Pour into your favorite coffee mug and enjoy the amazing flavors that you won't get from Starbucks.

11. Insert $16 into your 401k account and invest accordingly.

Contact Human Investing with any questions about your investments or savings rates. Or how to make a great cup of coffee.

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If you are looking for the best way to save for your kids’ future college expenses there isn’t necessarily a “one size fits all” solution. In fact there are a number of choices available, each with their own list of benefits and features. The 529 plan is probably the most common and well known option. Similar to a Roth IRA, a 529 plan offers tax-free growth as well as tax free withdrawals as long as the money is used for higher education expenses. This isn’t limited to major 4-year universities either. Most 2-year schools, community colleges, and trade schools qualify under the program.

In addition to tax free growth and tax free withdrawals, if you use your home-state sponsored plan (such as the Oregon College Savings Plan), your contributions may be deductible against your state income tax. These features make the 529 plan very attractive for those who want to maximize their savings for college.

One of the drawbacks of a 529 plan is the limited flexibility in the use of the money. For example, if your child does not go to college, or if they qualify for a scholarship, parents may have to pay a 10% penalty and income tax to otherwise access the money. So for parents who want to save for their children’s college but want to retain flexibility in case they decide to use the money for other purposes, then there is a better option.

For ultimate flexibility a parent can use a traditional brokerage account and invest the money for growth just like a 529 plan. With this option, you give up the tax benefits of the 529, but there are no restrictions on how the money is used and for whom. If the money is managed in a tax efficient manner, this can be a great alternative for many families.

One more option is a UTMA or UGMA account. These stand for Uniform Transfer to Minors Act and Uniform Gift to Minors Act. These accounts offer a middle ground between the two prior choices. On one hand, the money doesn’t have to be used for college expenses, but the account does have to be used for the benefit of the child only. There are also some tax benefits to these accounts as some of the growth may be taxed at the child’s tax rate, which is typically lower than the parent’s rate.

In summary, if you want the best plan to purely maximize college savings, the 529 is the best option. If you still want to provide savings for your kids, but aren’t 100% certain if you’ll need access to those funds down the road, then the other choices can be managed in a way to provide a very similar benefit, while providing additional flexibility.

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