Did COVID relief actually cost you $46,000 in your retirement account?

Did COVID relief actually cost you $46,000 in your retirement account?

Did COVID relief actually cost you $46,000 in your retirement account?

In March 2020, the CARES Act threw out financial lifelines for those affected by COVID-19. One of those lifelines loosened the normal restrictions on 401(k) withdrawals.

The program gave financially strapped retirement savers a quick means of raising cash to keep their bills paid.

But now, months later, coronavirus-related distributions have turned out to be vastly more expensive than anyone would have predicted.

Since the market crashed in March, share prices have shown exceptional strength. As you can see in the chart below, the S&P 500 grew some 46% between April 1 and Nov. 30 of this year.


That's great news for retirement savers who kept their money invested throughout the year. Unfortunately, it's not great news for anyone who took a coronavirus-related distribution earlier in 2020.

Depending on how your retirement funds were invested, your balance may or may not have been growing in lockstep with the market. But if you were seeing market-level growth in your retirement account and you'd taken the maximum $100,000 distribution in early April, that withdrawal may have cost you as much as $46,000 in lost earnings.

That's a tough number to accept, but it doesn't mean your retirement plan is dead in the water. If you're back on your feet today, take these three steps to minimize the damage and get your retirement plan back on course.


1. Plan to repay the funds before 2023

Normally, an early withdrawal from your retirement plan incurs both income taxes and penalties. In 2020, the CARES Act waived penalties for coronavirus-related distributions and also extended the timeline for paying the income taxes.

Instead of paying your taxes on the withdrawal by Tax Day of the following year, you can spread out the tax liability over three years.

Technically speaking, you'd recognize one-third of your distribution as income in each of your next three tax returns.

But here's the kicker. If you repay the withdrawal in full before the end of 2022, you get credited back all of the federal taxes you've paid on that distribution. Depending on your tax rate, that could save you $15,000 or $20,000 on a $100,000 distribution. To get your credit, you'd have to file amended tax returns for 2020 and 2021 once you repay the funds.

Check with your 401(k) plan administrator on the process for repayment. Know that you can't do it by increasing your paycheck deferrals, since the funds have to come from you. According to the IRS, your plan should treat the repayment as a rollover contribution.


2. Increase your contributions

While you're saving up the money to repay your distribution, you should also increase your regular retirement contributions if you can. Saving more is the only way to make up for those lost gains.

You might have to redo your budget and streamline your expenses to find the extra funds. It's worth the effort to do this now, rather than later. Money invested today is your most powerful weapon when it comes to building momentum in your long-term savings plan. That's because what you invest today has longer to grow than funds invested next month or next year.


3. Create an emergency fund

Lastly, make a plan to build an emergency cash fund. This will be the pot of money you can reach into next time instead of your retirement account.

Advisors generally recommend you target an emergency fund balance that covers three to six months of your living expenses.

If that amount seems unachievable, shoot for enough to pay your highest insurance deductible and one month of your rent or mortgage payment. Once you reach that goal, reassess and set a new target.


Close the door on 2020

You took a lifeline from your retirement plan and the stock market rallied in the months since. It's a crummy situation, for sure. But it's also water under the bridge, as they say. Don't get hung up on what could have been. Instead, chart a course for improved financial strength in 2021 and beyond.

Источник: https://www.foxbusiness.com/personal-finance/did-covid-relief-actually-cost-you-46000-in-your-retirement-account

Does Refinancing Student Loans Save Money?

Did COVID relief actually cost you $46,000 in your retirement account?

Refinancing your loans privately means you give up current and potentially future COVID-19 relief.

Generally, the more you owe on student loans, the more money you can save by refinancing.

Student loan refinancing will save you money if you qualify for a lower interest rate and either keep the same term length or get a shorter one. A lower rate can give you lower monthly student loan payments, a shorter repayment period or both.

» MORE: Calculate how much refinancing could save you

Get personalized student loan savings estimates

To estimate savings and decide whether you should refinance, you’ll need real rates your own financial profile. You are ly to get different rates at every lender you visit because each has its own underwriting standards; those determine who is offered a loan and at what interest rate.

Here’s how to compare offers from multiple lenders:

1. Get rate estimates. Visit the websites of several top student loan refinance lenders to get a sense of the interest rate you can expect from each lender. Some lenders offer pre-qualification, which means they’ll do a soft credit pull to estimate the interest rate you’ll qualify for. Soft credit pulls do not hurt your credit.

For lenders that don’t offer pre-qualification, you’ll need to apply before you can see personalized interest rates. Applications trigger a hard credit pull, which slightly hurts your credit. If you apply for multiple refinance loans within a short time period, the credit bureaus typically count it as a single hard pull, which preserves your credit score.

2. Compare the APRs that various lenders offer. Once you have several estimates or offers, compare rates apples-to-apples by looking at the annual percentage rates. APRs represent the true borrowing cost, including any fees that apply.

3. Consider other loan features too. Getting the lowest possible rate will ensure you save the most money. Additionally, pay attention to loans’ repayment options and terms. Choose the term length that your loans currently have — or a shorter one — to ensure you save money both monthly and long-term. See if you can qualify for a student loan refinance bonus as well.

How much could you save?

Student loan refinance lenders advertise that you could save “thousands,” which isn't necessarily an empty promise. They typically determine this number by comparing the average amount of interest a subset of their customers would pay with and without refinancing.

For instance, say the average customer owes $100,000 in student loans with an 8% interest rate.

On a 10-year repayment plan, that borrower would pay almost $46,000 in interest throughout the life of the loan.

If the same customer gets a 5% interest rate after refinancing and keeps a 10-year loan term, he or she would save about $18,000 by lowering their total interest payments to about $27,000.

Of course, you may owe much less or much more, and the rate you get depends on your credit score, income and financial health. That’s why you shop: to get real numbers.

Estimate your refinancing savings

Can you refinance student loans?

You can refinance both federal and private student loans. The federal government doesn’t offer student loan refinancing, but you can refinance federal loans through private lenders. To qualify, you typically need good credit, positive credit history and enough income to afford debt payments and expenses.

» MORE: Can you refinance student loans?

Should I refinance my student loans?

You should refinance your student loans if you would save money, you can qualify and your finances are stable. To qualify for the lowest rates — and the biggest savings — you’ll need an excellent credit score, clean credit history and enough income to support your debts and expenses.

If you have federal loans and are struggling to make consistent payments, refinancing is not for you. Instead, consider federal student loan consolidation or an income-driven repayment plan.

» MORE: Should I refinance my student loans?

Can I refinance my student loans more than once?

You can refinance student loans as often as you’d . If you’ve already refinanced and your credit has recently improved, consider refinancing again to lock in a lower rate. There are no application or origination fees, so refinancing won’t cost you anything.

» MORE: How often can I refinance student loans?

Источник: https://www.nerdwallet.com/article/loans/student-loans/does-refinancing-student-loans-save-money

Compensation Issues for Self-Employed S Corp. Owners

Did COVID relief actually cost you $46,000 in your retirement account?

Editor: Lorin D. Luchs, CPA, J.D., LL.M.

Many owners/sole employees of small businesses set up S corporations on the advice of their tax advisers and compensate themselves with wages and profit distributions.

Some of them pay themselves a low wage to save on employment (FICA) taxes and then get in trouble with the IRS because their wage is not “reasonable.” The end result is that they owe back taxes, penalties, and interest, and they will also have missed some important retirement contribution options.

This item discusses how reporting a higher wage can actually maximize long-term profits for the owner-employee of an S corporation.

S Corporation Owner Compensation

If the owner of an S corporation provides services to the S corporation, part of the business income can be considered wages and the rest as a distribution. The range of wages earned by the owner-employee must be reasonable with regard to services rendered and must follow IRS guidance. However, there is discretion in determining a wage payment.

To illustrate the effects of different wages, this item compares the income from two S corporations. (A downloadable and interactive spreadsheet is available at http://ahwang.pageout.net; under the “Research” link, click on “Course Content,” then select “Taxation.”)

Example: A Corp. and B Corp. each earned $200,000 in income before wage and retirement contributions (IBWRC). Because the owners of both companies are also employees, each will earn a wage.

Their companies will be able to deduct this wage as an expense and must pay FICA taxes. A is run by L, who pays himself a low salary of $15,500. H, the owner/employee of B, pays herself a high wage of $122,000.

Since L pays less in FICA taxes, it might be logical to assume that his tax burden would be less. However, if H is able to maximize her retirement contributions with a retirement plan such as a solo 401(k), her taxes will be surprisingly lower after future Social Security benefits are factored in.

The Advantages of a Solo 401(k)

Many options for retirement planning are available to the self-employed, such as profit-sharing plans, simplified employee pensions (SEPs), Keoghs, SIMPLE IRAs, and solo 401(k)s. A solo or self-employed 401(k) combines a profit-sharing plan with a 401(k) plan and allows a sole owner-employee to make greater tax-deferred contributions than would be permitted under the others.

The solo 401(k) has two components. First, it features an “employer” profit-sharing contribution component that allows the employer to contribute up to 25% of wages into a retirement fund, and it also reduces the business income by the same amount.

Second, it has an “employee” elective wage deferral that allows the employee to make a contribution of up to $15,500 in 2008 or 100% of compensation (whichever is lower). While still subject to the FICA employment tax, the deferred wage escapes current federal income tax.

The total for both components together is limited to $46,000 in 2008.

The maximum amount of total tax-deferred retirement contribution ($46,000 for 2008) is the same for a solo 401(k), a profit-sharing plan, a SEP, or a Keogh.

However, with the advantage of the $15,500 employee wage deferral, available only to a solo 401(k), the S owner/employee can maximize the retirement contribution with a wage compensation of $122,000 ([$46,000 – $15,500] ÷ 25%).

To contribute $46,000 to a retirement fund for those using a SEP, profit-sharing, or Keogh plan, the wage would need to be $184,000 ($46,000 ÷ 25%).

FICA Taxes

Since L earns only $15,500 from A, his personal FICA consists of Medicare taxes of $225 (1.45% of $15,500) plus Social Security taxes of $961 (6.2% of $15,500), for a total of $1,186. A also pays the same amount of FICA taxes; however, this is a tax-deductible expense for the company.

The calculations for H are markedly different. With an income of $122,000, H would pay Medicare taxes of $1,769 (1.45% of $122,000) plus Social Security taxes of $6,324 (6.2% of $102,000, the maximum wage subject to Social Security taxes in 2008), for a total of $8,093. H’s company would pay a amount, and this expense would also be tax deductible.

Taxable Income After Retirement Contribution

Even though both companies have earned $200,000 (IBWRC), factoring in retirement contributions produces some real differences in L’s and H’s  taxable income if both taxpayers have a solo 401(k) plan in place and maximize their tax-deferred contributions.

With $15,500 in wages, L can contribute only $3,875 (25% of $15,500) for the employer portion of his solo 401(k) and $15,500 for the employee component if he wishes to maximize his retirement contributions.

Beginning with the $200,000 S corporation income, less the $15,500 “employee” contribution and the $3,875 “employer” contribution to his solo 401(k) retirement, less the tax-deductible portion of FICA taxes paid by the S corporation ($1,186), A has a profit of $179,439 to be distributed to L.

Because L elects to defer 100% of his $15,500 wage to his retirement contribution, he now has a total taxable income of $179,439.

H, on the other hand, can put far more into retirement and therefore has lower taxable income. H’s employee contribution would be the same as L’s, $15,500. If she wishes to maximize her employer contribution, she would be able to contribute as much as $30,500 (25% of $122,000).

These amounts added together equal the $46,000 limit for 2008. Thus, the $200,000 S corporation income results in a distribution of $39,407 after wages ($122,000), employer retirement contributions ($30,500), and FICA taxes ($8,093) are subtracted. Her wages of $122,000 less the employee contribution of $15,500 results in $106,500.

H’s total taxable income is $145,907 ($106,500 + $39,407).

Effective Tax Rate Before FICA Taxes

Since L and H have significantly different taxable incomes, it is no surprise that their tax burdens will be different.

his $179,439 taxable income, L would owe $48,591 in personal income taxes before FICA taxes are calculated if he files as married filing separately. This represents an effective tax rate of 27.

08% ($48,591 ÷ $179,439). This rate is important in calculating his total taxes, to be illustrated later.

With a taxable income of $145,907, H’s personal income taxes are $37,514 before FICA. The effective tax rate here is 25.71% ($37,514 ÷ $145,907), the schedule for married filing separately.

Calculation of Tax Burden

Given the effective tax rate computed above, the total taxes due on each individual’s taxable income can be calculated. With an effective tax rate of 27.08%, L’s wage of $15,500 would result in taxes of $4,197 (27.08% × $15,500) if he were not contributing to his retirement plan.

The next factor is FICA taxes, which are paid by both the employee and the employer.

The portion of FICA paid by the employer, however, is a tax-deductible business expense to the S corporation and results in a tax saving. L pays FICA of $1,186, as shown above.

The S corporation pays the same amount and enjoys a tax deduction of $321 (27.08% × $1,186). The outcome is net FICA taxes of $2,051 ($1,186 × 2 – $321).

The taxes on L’s profit distribution of $179,439 are $48,592 (27.08% × $179,439). In summary, L has $50,643 total tax due, which includes $4,197 on the $15,500 wage, plus $2,051 for the net FICA tax, less a tax saving of $4,197 due to the contribution of his entire wage to retirement, plus $48,592 taxes on the $179,439 profit distribution.

Even with a much higher wage of $122,000, H pays a total tax of $51,619. The amount is only $976 higher than the $50,643 taxes to be paid by L.

While H pays higher FICA taxes, she is able to reduce her total tax bill by taking full advantage of the tax savings on her retirement contribution. In addition, she has paid substantially more into her Social Security.

Once the benefit to be received from Social Security contribution is considered, H’s tax burden will be substantially less than L’s.

Consideration of Social Security Benefits

Although the taxpayer will not be able to access Social Security benefits immediately, they can be a significant source of income in retirement. A precise calculation of Social Security benefits is beyond the scope of this item.

Historically, however, researchers have found that individuals receive greater lifetime returns than they paid in Social Security taxes. (See, e.g., Leimer, “A Guide to Social Security Money’s Worth Issues,” 58 Social Security Bulletin, No. 2 (1995): 3–20.

) For the purposes of this item, assume that L’s and H’s Social Security benefits will equal their actual contributions.

L pays $50,643 in taxes, resulting in a tax rate of 25.32% ($50,643 ÷ $200,000). Only $1,922 of his FICA taxes go to Social Security (both he and his S corporation pay $961). If the Social Security benefit is subtracted from taxes paid, L’s true tax is $48,721. Essentially, the tax rate is 24.36% ($48,721 ÷ $200,000).

Because H earned a wage of $122,000, her calculations are much different. She will pay $51,619 in taxes for a 25.81% rate ($51,619 ÷ $200,000).

Of this amount, $12,648 will be contributed to her Social Security (both she and her S corporation pay $6,324). In this instance, if her Social Security benefit is subtracted from the taxes, H has a much lower tax in the amount of $38,971.

This represents 19.49% of her income before wages and retirement contribution ($38,971 ÷ $200,000).


These calculations illustrate that reporting a low wage is not advantageous. L, an S corporation owner who is also an employee providing service to the business, may think that taking a small wage reduces his FICA taxes and hence maximizes his income.

However, with a low wage, he loses the tax savings opportunities on his retirement contribution, increases his effective tax rate on the profit distribution, and eventually pays taxes similar to the amount paid by H.

In addition, L would further miss earnings opportunities by forgoing tax-deferred retirement contributions.

H, who pays herself a higher wage, is able to defer her taxes by making the maximum retirement contribution. While paying higher FICA taxes due to her higher wage, H is able to more fully fund her Social Security. This results in not only a lower tax rate when the Social Security benefit is factored in, but perhaps also a more comfortable retirement.


Lorin D. Luchs, Partner, Washington National Tax Office BDO Seidman, LLP, Bethesda, MD.

Unless otherwise indicated, contributors are members of or associated with BDO Seidman, LLP.

If you would additional information about these items, contact Mr. Luchs at (301) 634-0250 or lluchs@bdo.com.

Источник: https://www.thetaxadviser.com/issues/2008/may/compensationissuesforself-employedscorpowners.html

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