blog, John J. Bowman Jr Accountant, John J. Bowman Jr. Accountant, personal finance, tax

What to Know About Taxes and Retirement Income

Taxes are one of the most important things to consider when saving for retirement. The way you are taxed depends on the instruments you’re using to save. Sometimes, savers are taxed at the time they put money away. At other times, their contributions are tax-free, but taxes are scheduled to be collected when they’re distributed down the line. It’s important for people to understand a little about how this all works. It can prevent unpleasant surprises in the future.

Former federal employees will find that their FERS annuity is taxed like regular income at the federal level. Depending on the state, it can be taxed at that level, too. Over 80% of retirees’ Social Security payments are also taxable as ordinary income. People can elect to have taxes withheld from their payments, but that doesn’t happen automatically. If not, they will have to pay at tax time. People should make this decision carefully, ideally after talking with a financial advisor.

Retirement accounts that people may contribute to taking different approaches to taxes. With a Roth IRA, account holders pay taxes upfront, when they make deposits. Later, their withdrawals in retirement are tax-free. This is essentially the opposite of a traditional IRA. Contributions are tax-advantage, but distributions are taxed later on. Some people maintain both types of accounts, in order to reap the tax advantages on both ends.

401(k) and 403(b) are popular retirement plans that are offered by employers to their workers. 401(k)s are generally available from for-profit companies, and 403(b)s from charities and religious organizations. These plans offer tax benefits upfront. Employers take money from each paycheck on a pre-tax basis and place it in a plan where the money grows for the account holder. Generally, 401(k) distributions are taxed as normal income. There are Roth 401(k) accounts available, and contributions to those are taxed.

Retirement planning is complicated. It’s important that every worker keeps one eye on the future and considers what they want their retirement years to look at. Being more aggressive, and taking advantage of some Roth-style accounts, can be a good idea for many American workers. Speaking with a financial advisor about these decisions can be prudent.

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blog, John J. Bowman Jr Accountant, John J. Bowman Jr. Accountant, personal finance, tax

Four Purchases That Should Never be Made With a Debit Card

Although debit cards are extremely convenient, they aren’t always the right choice for payments. Under some circumstances, it’s actually more beneficial to use a credit card. Here are four things that should always be paid for with a credit card instead of a debit card.

Furniture and Appliances

Large home purchases, such as furniture and appliances, should always be made with a credit card. These purchases are large enough that a mistake by the delivery team or the manufacturer can cost buyers thousands of dollars. With a credit card, it’s possible to dispute the charges, even if the seller isn’t willing to arrange a refund directly. In addition, the size of these purchases means that even 1-2 percent cashback will add up to a considerable sum of money.

Car Rentals

When renting a car, it’s almost imperative to use a credit card. Even if the rental company will allow renters to pay with a debit card, they should expect to pay a large additional fee in order to do so. Rental car companies also tend to run credit checks on renters who pay with debit cards. This, in turn, can cause damage to the renter’s credit score by adding an unnecessary hard inquiry. To avoid this hassle and expense, anyone renting a car should be prepared to pay with a credit card.

Recurring Payments

People with memberships and subscriptions often make the mistake of billing their bank accounts directly through their debit cards. While there’s little risk of losing money this way, credit card rewards on these recurring payments can add up over time to significant amounts. Points, miles, and cashback rewards can all be built on recurring payments with no extra effort. Given this fact, it rarely makes sense to make these recurring payments using anything other than a credit card.

Online Purchases

Unfortunately, online scams are everywhere these days. Sellers who bait and switch their buyers or fail to deliver at all are quite common, even on major online platforms. Credit cards offer a degree of protection against this kind of behavior by allowing buyers to dispute charges and get their money back.

While debit cards certainly have their place, they aren’t for everything. These four types of purchases are generally best made with credit cards, as debit cards introduce higher risks or lower rewards in these cases.

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