Money Management

Are you among the almost 50% of Americans who don’t have an IRA or a workplace plan? Read on to see why you should open one. 

You’ll often hear that it’s important to set money aside for retirement. And while you could always keep your nest egg in a regular savings account, a better bet may be to house that money in an IRA or 401(k).

But surprisingly, only 54.3% of Americans have a retirement account, according to recent data from the Federal Reserve. If you’re currently without an IRA or 401(k), here are a few reasons to sign up.

1. Future financial security

You may have gone through periods of life when you were pretty cash-strapped. Well, if it wasn’t fun being almost broke in your 20s, imagine how not fun it might be to land in a similar boat in your 60s or 70s.

A lot of people think they don’t need to save for retirement and can instead just plan to collect Social Security. Those benefits, however, will only replace about 40% of your pre-retirement income if you earn a typical wage. If the idea of a 60% pay cut doesn’t appeal to you, then that alone is a good reason to open an IRA or 401(k).

2. Near-term tax savings

When you put money into a regular savings account, it doesn’t do anything positive for your taxes. In fact, the interest you earn on your savings account balance adds to your tax burden.

But the money you put into a traditional IRA or 401(k) serves as a tax break, because the IRS can’t tax you on your contributions. So let’s say you put $3,000 into your traditional IRA this year and your tax bracket is 22%. This means you’re saving yourself $660 right there.

3. Tax-advantaged growth on your investments

When you invest in a traditional brokerage account and make money on your investments, the IRS taxes you the same year — and every year you make a profit. With a traditional IRA or 401(k), taxes on gains are deferred, so you don’t pay them until you take withdrawals from your account. With a Roth IRA or 401(k), investment gains are completely tax-free.

Open a retirement account ASAP

You might think it doesn’t make sense to open a retirement account until you have a substantial amount of money to contribute to it. But you can start by saving $50 or $100 in an IRA or 401(k), and that’s totally fine. The key is to just get started.

First, see if your workplace offers a retirement plan like a 401(k) or 403(b). If you work for a school or nonprofit organization, the latter may be an option you’re presented with, but you should know that 403(b)s work just like 401(k)s.

If you don’t have access to a workplace retirement plan, you’re not at all out of luck. As long as you earn income, you can open an IRA at any bank or financial institution that offers one and manage that account yourself. But do yourself a favor and get the ball rolling so you can begin to set yourself up with a retirement nest egg while enjoying tax benefits along the way.

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Believe it or not, your bank can penalize you for moving your own money around too much. Find out what you need to know to avoid costly fees. 

The holidays are almost here, and that means it’s about time to crack open the savings account that you’ve (hopefully) been adding to all year long. You’ve probably got a lot you need to buy before we ring in 2024, and I’m guessing you don’t want to spend more than you have to.

You likely know about savings techniques like comparison shopping and using coupons. But sometimes saving money is as simple as avoiding costly errors. Here’s one mistake that could cost you big time.

The ghost of Regulation D still lingers

Prior to the pandemic, there was a federal rule known as Regulation D that dealt with savings account withdrawals. Essentially, it limited you to six “convenient” savings account withdrawals per month. Convenient withdrawals were things like moving money out of your account electronically, debit card transactions, check withdrawals, or wire transfers.

If you exceeded your six convenient withdrawals per month, you either had to pay a fee for each additional monthly withdrawal you made or limit yourself to “inconvenient” withdrawals, like visiting a bank branch or an ATM. Fees varied by bank, but they could be as much as $15 per transaction. A handful of those could easily lead to racking up a few hundred dollars in fees.

But then COVID-19 happened and the Federal Reserve, America’s central bank, decided it wasn’t nice to restrict people’s access to their savings when they didn’t have jobs. So it suspended Regulation D on April 28, 2020 and so far, it hasn’t reinstated it.

You might assume that all these excessive withdrawal fees just went away after that, but that’s not true. Some banks have remained decidedly old-fashioned and kept the excessive withdrawal fees for those who make more than six monthly savings account withdrawals. Other banks now allow more monthly withdrawals, but still happily charge customers who exceed their limits. So like it or not, you need to play by your bank’s rules if you want to avoid extra fees this holiday season.

How to avoid excessive transaction fees

Avoiding excessive transaction fees isn’t too difficult once you understand your bank’s limitations. The first step is to figure out how many monthly withdrawals you’re allowed and which types of transactions count toward your monthly limit. You should be able to find this in the fee schedule for your savings account. But if you can’t or you don’t want to read through all the fine print, you can always just contact your bank and ask.

Do your best to stay below your bank’s monthly transaction limit. If you anticipate a lot of spending, make larger, less frequent withdrawals in order to keep yourself to just a few each month. If it turns out you don’t need all the money you took out of your savings account, you can always put the extra back later. There is no limit to the number of deposits you can make to your savings account each month.

If you do inadvertently exceed your bank’s transaction limit, see if you can delay future purchases until the next month. Or limit yourself to types of transactions your bank doesn’t penalize. For example, if transfers initiated by a bank teller at a branch don’t count toward your monthly limit, you may have to head down to your neighborhood bank instead of moving your money yourself online. It’s a pain, but it’s better than paying boatloads in fees to access your own money.

We can hope that one day banks will get rid of these fees for good, but that doesn’t seem likely anytime soon. So for now, it’s just something to be aware of. And if you decide to shop for a new savings account in the future, add this to your list of factors to consider when deciding which is right for you.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Many parents struggle with child care expenses. Read on to see why the situation might get even worse. 

Raising a child is hardly an inexpensive prospect. Recent research from The Ascent found that it costs about $300,000 to raise a child from birth to 17 years of age, depending on the rate of inflation. And while housing is the most expensive aspect of raising a child, child care and education expenses account for 16% of the cost.

Meanwhile, Care.com reports that 67% of parents are currently spending 20% or more of their annual income on child care. And given that the weekly rate for a daycare center has reached an average of $284 on a national level, it’s no wonder so many parents are raiding their savings accounts just to secure care.

But soon, the cost of child care might rise even more for a large number of people. And that could be financially catastrophic.

A loss of federal subsidies could result in higher costs for parents

During the pandemic, child care centers needed funding to stay afloat. As part of the American Rescue Plan, the massive 2021 relief bill that put $1,400 stimulus checks in Americans’ bank accounts, the government provided states with almost $24 billion in stabilization funds to keep child care providers open.

But that aid expired at the end of September. And now, many child care centers are at risk of closing due to a lack of funding. Once that happens, parents will have fewer choices for securing care — and they might have to pay up because of that.

That assumes, of course, that parents who lose their child care providers are even able to find new ones. There are regulations in place to help ensure that care centers don’t take on more enrollees than they can handle. So if a large number of daycares shutter in the absence of federal aid, some parents might actually have to give up their jobs and lose income due to having no options.

How to keep your child care costs down

In many cases, there’s not much you can do to keep your child care costs down other than shop around in your area and compare rates among providers. But remember, we’re talking about having your child (who may be an infant or toddler) cared for. So saving $20 a week may not be worth it if it means moving your child over to a care center whose reputation isn’t so stellar, or that doesn’t have the same number of staff members as one that’s a touch more expensive.

That said, one way you might be able to cut down your child care costs is to negotiate your working hours with your employer. This strategy might especially work if you have a co-parent or partner who’s raising your child with you.

Let’s say your partner works a traditional 9-to-5 job but is home by 6 p.m. to take over child care. If you’re able to get your employer to let you work from 2 p.m. to 10 p.m., you can potentially pay for just a half-day of daycare and bank the difference.

Of course, working those hours may not be optimal. But remember, once your kids are old enough to attend school, the cost of child care might drop, since at that point, you’re only paying for before- and after-school care. So it may be worth the sacrifice for a couple of years.

Another thing worth doing is signing up for a dependent care FSA through your employer if it’s offered. You’ll be eligible to contribute up to $5,000 tax-free to pay for child care expenses, which means you won’t be taxed on $5,000 of income. Granted, your total tab might well surpass $5,000, but you can at least reap savings on part of that cost.

All told, child care is an unavoidable expense for a lot of people. If you’re able to shrink it even a little bit, it could work wonders for your financial situation.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Smart planning now could save you thousands of dollars. Read on to learn how you can improve your tax situation before the year comes to a close. 

There are just over two months left in 2023, and it’s a good time to start thinking about the tax return that you’ll file in 2024. Although we’re almost through 10 months of the tax year, you might be surprised at how many moves you can make before the end of the year that could lower your tax bill significantly. Here are three that could potentially save you thousands of dollars.

1. Increase your 401(k) contributions

If you save for retirement through a traditional or Roth IRA, you have until the April 2024 tax deadline to make your 2023 contributions. But when it comes to your 401(k) or similar retirement plan at work, you have to get them in by the end of the year.

So, if you can do it, it could be a smart idea to increase your retirement plan contributions for the last couple months of the year. The IRS allows elective deferrals of as much as $22,500 into qualified retirement plans, or $30,000 if you’re age 50 or older. And while you might not be able to contribute quite that much, the point is that for some people, there’s plenty of room for a year-end boost.

Not only will your 401(k) contributions reduce your taxable income, but you’ll be setting yourself up for a more comfortable retirement.

2. Pay your mortgage early

Well, your January payment at least. This could be a nice year-end tax hack if you itemize deductions.

It’s well-known that the IRS allows a deduction for mortgage interest on as much as $750,000 in qualified mortgage debt. But what you might not realize is that you can deduct all of the interest you pay in a given year, not just what was billed.

Here’s why that is important: Let’s say that your mortgage payment is $2,000 per month, and roughly 50% of it is interest. You make all 12 of your monthly mortgage payments throughout the year, resulting in $12,000 in deductible interest. But what if you choose to make your January mortgage payment before Dec. 31? Now you have an additional $1,000 in mortgage interest to deduct this year.

3. Boost your charitable giving

Charitable contributions are one of the most common itemized deductions and must be completed on or before Dec. 31 to count on your 2023 taxes.

One tip is that you don’t necessarily have to donate money, so if you don’t have as much cash available as you’d like, you may still be able to take advantage. You can donate clothing to an organization like Salvation Army, or you can donate your kids’ toys they’ve outgrown and get a deduction for a reasonable value of these items.

A particularly tax-efficient way to give is to donate stock that has gone up in value significantly since you bought it. You get to take a tax deduction for the full market value of the donated shares, but you don’t have to pay any capital gains tax as you would if you had sold them and donated cash.

You could have quite an impact on your tax bill

With just these three strategies, many people could make a large impact on their tax bill. For example, let’s say that you make an extra mortgage payment with $1,000 of interest, donate $2,000 worth of appreciated stock, and contribute $2,000 extra to your 401(k). If you’re in the 24% tax bracket, these moves could save you $1,200 on your federal tax bill. And that doesn’t consider any state tax savings or the capital gains tax you can avoid.

Of course, all three of these won’t apply to everyone. But even if one or two of them do, you might be surprised at how much of an impact you can have on your 2023 taxes with just over two months left in the year.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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