Unemployed? Top 5 Tax Traps!

Author: Cindy Morus

Source: ezinearticles.com



If you're unemployed, you've got a lot of company out there. AND, there are some tax traps that could make your financial situation a lot worse. Avoid these common tax problems now!

Tax Trap #1: Unemployment Income isn't taxable. Sorry, the tax man does wants a cut of the action even when you're unemployed. The easiest way to handle the taxes is to have them withheld just like a paycheck.
Tax Trap #2: Killing Your Golden Goose When You Raid Retirement Accounts. The last accounts you want to tap are your retirement accounts for several reasons. Since the amount you take out is taxable, the IRS requires that 20% be withheld to cover the taxes.So, if you request $10,000, you're only going to get $8,000. Since the $10,000 would be added to any other income you have for the year, you may be pushed into the next tax bracket and the $2,000 may not even be enough. PLUS, there will be 10% penalty that can't be reduced by any other credits.Your state will tax the income and may also charge penalties for withdrawing early.
Tax Trap #3: IRAs can cover certain expenses such as re-training expenses paid directly to a qualified educational institution, health insurance premiums or even early retirement, BUT, you have to handle the withdrawals exactly right or you'll be socked with taxes. Check with your tax preparer and/or financial advisor.
Tax Trap #4: Debt Settlements are taxable unless you fall into certain categories. So, if you have a $10,000 balance and the creditor takes $5,000 and call it paid off, you'll receive a 1099-C for the amount of debt that was canceled. Be sure to take this document to your tax preparer. There are some special rules for debt that is canceled through foreclosure. Debt discharged through bankruptcy are not taxable.
Tax Trap #5: 401(k), income tax bracket, Loans are taxable if you leave your job (for any reason). If you borrow from your 401(k) and are laid off or leave for any reason including disability, your loan becomes due immediately. If you are unable to pay it back, it will be considered a distribution and you will be taxed on it and pay the 10% penalty. However, you would have received the entire amount requested with no taxes withheld like the above example. Therefore, you will have to come up with all the taxes and the penalty on your own. It may take a couple of years for them to actually catch up to you and the IRS will add taxes and penalties in the meantime.

Before you start taking money out of accounts, meet with your tax preparer and do some tax planning to make sure you don't cost yourself money in taxes, fees or penalties.

Money Mender, Cindy Morus, is a leading authority on showing you how to achieve and enjoy financial well-being and peace of mind. Cindy is also a licensed tax preparer. Get a copy of her latest report at http://www.MendYourMoney.com

"Working with Cindy changed my life. I experienced financial and emotional healing. I cannot thank her enough." Janet D. (Widowed, Single Mom, Age 50, Teacher, Hood River, Oregon).

Cindy also provides one-on-one coaching by telephone and email to clients throughout the United States and Canada. She's helped thousands of people and she can help you, too.

Cindy doesn't sell any investments or insurance or offer legal advice. The education she provides is targeted to your situation.

Roth 401(k) Gets An Extension

Author: Andrew Marx

Source: download



The Pension Protection Act of 2006 was passed last month and it means the Roth as a 401(k) will exist as a permanent account option, in addition to a traditional 401(k) or 403(b) offered by your employer. That affects how you might put money into retirement accounts going forward.
Did I just lose your attention?
I know for many people, a lot of this information blows right over them like a light breeze. While I don't expect you to jump for joy at hearing about retirement options, you still should have a basic understanding of how the Pension Protection Act can affect your future.
Let me see if I can make it palatable.
As soon as you enter the full time work force, you should begin to contribute towards your retirement. You have options. One is to contribute through your employer's 401(k) or 403(b) plan. The whole point of your employer offering this benefit is that the amount can be withdrawn from your paycheck pre-tax, and in many cases, your employer will contribute their own money to add to your investment funds. That is a spectacularly good deal. My employer's contribution to my 403(b) is around $4,000 annually. That money supplements my paycheck, not now, but when I am ready to retire. That money is not taxable until I retire and make withdrawals from the account.
However, you do not have to go through your employer to contribute towards your retirement. Enter the IRA (Individual Retirement Accounts) and the Roth IRA. Most people can contribute to both the IRA and the 401(k). Traditional IRA accounts are dollars you invest, then get a tax break on those funds at the end of the year and it is the equivalent of a pre-tax investment, like the 401(k).
Roth was created to give you an alternative to traditional IRAs. The principle difference is that Roth contributions are taxed income. Since you pay taxes on it before you invest the funds, you do not have to pay taxes on it when you withdraw the funds at retirement age. The basic concept is that simple. Pay taxes on the contribution now, while your tax bracket is probably lower than it will be, and as long as you follow the rules for the account, do not pay taxes on that same money again.
Roth also exists as a 401(k) account that you can contribute through your employer, an alternative to the traditional 401(k) described earlier. The difference is that the Roth 401(k) uses already taxed dollars to contribute to the plan. The same concept as the Roth IRA, you do not then pay taxes on that contribution when you retire as long as you follow certain rules. The Roth 401(k) was originally designed to phase out after 2010, but the Act makes it a permanent option. That makes it more attractive for employers to offer it, and more employers will do so.
What you should do right now if you are interested in more information is go to your employer's benefit office and find out what kind of retirement plans they offer, most likely a 401(k) or 403(b). Ask them about eligibility criteria for the plans. You can separately contact any number of personal investment companies like Scottrade and Vanguard to open up an IRA or Roth IRA.


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Andrew Marx is a prolific author and his expertise includes the practical and legal aspects of personal finance and higher education. His body of work is published at http://www.smartremarx.com/