MONEY Taxes

Why Some Taxpayers Are In for a Big Shock This Year

Many middle-class families who got subsidized health coverage through Obamacare in 2014 are facing an unexpected tax bill now.

Roberta and Curtis Campbell typically look forward to tax time. Most years, they receive a refund–a little extra cash to pay off credit card bills.

But this year the California couple got a shock: According to their tax preparer, they owe the IRS more than $6,000.

That’s the money the Campbells received from the federal government last year to make their Obamacare health coverage more affordable. Roberta, unemployed when she signed up for the plan, got a job halfway through the year and Curtis found full-time work. The couple’s total yearly income became too high to qualify for federal subsidies. Now they have to pay all the money all back.

“Oh my goodness, this is just not right,” said Roberta Campbell, who lives in the Sacramento suburb of Roseville. “This is supposed to be a safety net health care and I am getting burned left and right by having used it.”

As tax day approaches, hundreds of thousands of families who enrolled in plans through the insurance marketplaces could be stuck with unexpected tax bills, according to researchers. Those payments could be as high as $11,000, although most would be several hundred dollars, one study found.

The result is frustration and confusion among some working and middle-class taxpayers, whom the Affordable Care Act was specifically intended to help. The repayment obligations could dissuade people from re-enrolling and provide more fuel to Republicans’ continuing push for a repeal of the law.

The problem is that many consumers didn’t realize that the subsidies were based on their total year-end income and couldn’t reliably project what would happen over the course of the year, said Alyene Senger, research associate at The Heritage Foundation, a conservative think tank.

“How do you know if you are going to get that promotion?” she said. “How do you know what your Christmas bonus is going to be?”

In addition, Senger said the government didn’t go out of its way to publicize the tax consequences of receiving too much in federal subsidies. “It isn’t really something the administration focused on heavily,” she said. “It’s not exactly popular.”

The system was intended to ensure that people received the right amount in subsidies, no more or less than needed. But the means the government chose to reconcile the numbers was the tax system — notorious for its complexity well before the Affordable Care Act passed.

Enrollees who enrolled in Obamacare now are realizing that certain positive life changes–a pay raise, a marriage, a spouse’s new job–can turn out to be a liability at tax time. “We are definitely seeing some pain,” said Jackie Perlman, a principal tax research analyst at H&R Block.

H&R Block released a report Tuesday saying that 52% of customers who received health coverage through the insurance marketplaces last year underestimated their income and now owe the government. They estimate that the average subsidy repayment amount is $530.

At the same time, about a third of those enrolled in marketplace coverage overestimated their income and are receiving money back–about $365 on average, the report said.

Under the Affordable Care Act, the federal government made subsidies available to people who earned up to 400% of the federal poverty level—about $47,000 for an individual and $63,000 for a couple. For families who ended up making less than that, the federal government limits any repayments that might be due: The poorest consumers will have to repay no more than $300 and most others no more than $2,500. But the Campbells’ income last year exceeded the limit to receive federal help, so they have pay back the whole amount.

Roberta Campbell said she was only trying to do the right thing. Campbell, now 59, lost her job as a program director for the Arthritis Foundation in late 2012. She and her husband, who was working part-time as a merchandiser, downsized and moved into a smaller house.

They were left uninsured but were mindful of the federal mandate to be covered as of January 2014. So they signed up for a plan through California’s insurance marketplace, Covered California. The plan cost about $1,400 a month, but they were able to qualify for a monthly subsidy of about $1,000.

“We are rule followers,” she said. “We decided to get insurance because we were supposed to get insurance.”

They barely used the coverage. Roberta and Curtis each went to the doctor once for a check-up. Then, about halfway through the year, Roberta got a job at UC Davis and became insured through the university. Curtis, who had been working part-time, got a full-time job for a magazine distribution company.

They notified Covered California, which Campbell said cancelled the insurance after 30 days. But with the new salaries, his pension from a previous career and a brief period of unemployment compensation, the couple’s year-end income totaled about $85,000, making them ineligible for any subsidies.

Their tax preparer told them they would have been better off not getting insurance at all and just paying the fine for being uninsured. In that case, the Campbells say their financial obligation would have been much smaller–about $850.

“The ironic thing is that we tried to pull ourselves up by our bootstraps,” Curtis Campbell said. “Now they are going to penalize us. It’s frustrating.”

It’s not surprising that the projections people made about their income in 2014 in many cases were incorrect, said Gerald Kominski, director of the UCLA Center for Health Policy Research. The first open enrollment period started in October 2013, meaning that some enrollees based their estimates on what they earned in 2012.

Kominski said that policy experts knew there would be significant “churn” of people whose incomes change throughout the year and who would gain or lose their eligibility for subsidized coverage. But he and others said there was less understanding among consumers about how that could affect their taxes.

With tax season still underway, it not entirely clear how many people will have to repay the government for excess subsidies. But along with the recent H & R block estimates based on the firm’s customers, a UC Berkeley Labor Center study published in Health Affairs in 2013 suggested the numbers would not be not small.

Nationwide, 6.7 million people enrolled in marketplace exchanges through Obamacare in the first year. About 85% of people got federal help paying their insurance premiums.

Using California as a model, labor center chair Ken Jacobs estimated that even if everyone reported income changes to the insurance marketplace during the year, nearly 23 percent of consumers who were eligible for subsidies would have to pay the government back at least some of the amount received. About 9 percent of those receiving subsidies would have to pay the full amount. If no one reported changes, 38 percent would owe money.

The median repayment–if people reported income changes along the way—would be about $243 but some couples could owe more than $11,000, according to the research. The median amount due if people didn’t report the changes during the year would be $750.

“The most important thing for people to do along the way is to report [income] changes so the subsidy amount is adjusted,” Jacobs said.

For those who must repay money, the IRS will allow payment in installments, even after the April 15 tax deadline. Interest will continue accruing, however, until the balance is paid.

Covered California spokesman Dana Howard said he understands paying back excess subsidies puts some in a difficult spot. But he said consumers who think their circumstances might change can decline the money or just take part of it.

Howard also said the subsidies were designed to give the working class and middle class folks a leg up in affording health coverage. So when people get good jobs, he said, they don’t necessarily need the federal help to get insurance.

“When you get that really good fortune, that has to be shared back,” Howard said. “That is just how the ACA law was written.”

Kaiser Health News (KHN) is a national health policy news service. It is an editorially independent program of the Henry J. Kaiser Family Foundation.

MONEY Taxes

Your Kids Are the New ID Theft Targets — Here’s How to Protect Them

child fingerpainting
Meg Fahrenbach—Getty Images

Identity theft poses a huge risk to your children's financial future, but it could make a mess of your taxes, too.

Filing your taxes should trigger a feeling of relief — it’s a huge thing you get to scratch off your to-do list — but millions of taxpayers have submitted their taxes only to have a very unpleasant experience: that their Social Security number has already been used in a tax filing. Most people discover this when attempting to file their taxes online, and they’ll instantly receive a notification from the IRS that the return has been rejected as a fraud attempt.

Instead of marking the end of your tax adventures for the year, such a notification is only the beginning of the many months it will take to correct your taxes. Risk isn’t limited to your Social Security number — if you have dependents and someone fraudulently files taxes with their Social Security numbers before you do, it will affect your return.

It happens. Identity theft among children is sometimes harder to detect, because one of the best ways to discover fraud is by checking credit reports. Your child shouldn’t have a credit report until he or she has a loan or credit card in his or her name, so parents assume there’s nothing to use as a fraud detector in the first place.

If Someone Claims Your Child as a Dependent

When you try to file your taxes, rightfully claiming your child as a dependent, you’ll likely receive a message from the IRS saying someone has already claimed the person with that Social Security number as a dependent and your return has been modified to exclude that person. That will affect the refund you receive (or how much you owe the IRS), even though you can rightfully claim the child as your dependent.

At this point, you need to do two very important things: Start the process of fixing the problem, and protect your child’s identity from further abuse.

How to Fix Your Taxes After Fraud

Jared Callister, a partner and tax attorney at Fishman Larsen Chaltraw & Zeitler in California, said the first thing you should do is contact the IRS to dispute the rejection of your dependent claim. The message from the IRS informing you of the issue should include contact information.

“Write a quick letter to that response, saying it’s your child and you want the IRS to adjust it back to what the original return said,” Callister said.

Then you need to notify the IRS of the identity theft by filling out Form 14039, Identity Theft Affidavit on behalf of your child.

“And then you’re just kind of waiting for a response from the IRS,” Callister said. “My guess is it will take about 6 months to get that resolved.”

To follow up on identity theft issues regarding taxes, you can contact the Identity Protection Specialized Unit at 1-800-908-4490 — expect to be on hold for a long time, especially if you’re calling during filing season.

How to Protect Your Kids From Further Fraud

Once someone’s Social Security number has been stolen, it can be extremely difficult to prevent abuse. Contact the credit bureaus and notify them your child’s Social Security number has been stolen, and regularly request the child’s credit reports to make sure no one is opening unauthorized accounts in his or her name.

Undetected fraud can wreck a child’s credit before he or she has had a chance to establish it, which is why it’s important to intervene early. Most parents want their children to enter adulthood with a good financial foundation, and credit is a huge part of that, so take action quickly if you sense your child’s identity has been abused.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Social Security

The Taxing Problem With Working Longer

Earning money after you start collecting Social Security can be a tax headache.

The question of when and how to file for Social Security is a tough one for many retirees—I regularly field questions on the topic. Recently a reader wrote to say he’d like to draw Social Security benefits at age 66 yet keep working until 75. What are the tax implications?

When you continue to work and draw Social Security, your benefits are reduced temporarily if you’re 65 or younger and your outside income exceeds certain levels. After 65, these reductions do not apply. You may, however, owe taxes on your Social Security income.

How Earnings Can Hurt

Not all of your Social Security income is taxable. Social Security uses a measure it calls “combined income” to determine how much of your benefit is taxable, and it can be tricky to understand.

To determine your combined income, take your adjusted gross income (check last year’s tax return), then add any nontaxable interest income and half of your Social Security benefit. (If you haven’t started claiming, you can get a projection online by setting up an account at ssa.gov.)

If the total is less than $25,000 ($32,000 on joint tax returns), you owe no income taxes on your Social Security benefits. If the total is between $25,000 and $34,000 ($32,000 and $44,000 on joint returns), you may have to pay taxes on half of your Social Security that’s over that threshold. Above that, 85% of your benefits may be taxable—the top rate.

Here’s how that could play out. Take a retiree in the 15% federal tax bracket who is taxed on 50% of his Social Security. When he earns another $1,000, his so-called combined income rises by that much too, subjecting another $500 of Social Security income to taxes. So the tax bill on that $1,000 won’t be $150 (15% of $1,000) but $225 (15% of $1,500), for an effective rate of 22.5%.

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MONEY

Your Workarounds

Beefing up your tax-free holdings, especially Roth IRAs, can mean money coming in that won’t trigger more taxable Social Security income. (Working less lowers your tax bill too, but you’re usually better off earning the money.)

If you can live on just your salary, deferring Social Security until age 70 also helps. Your taxes should be lower while you wait. And delaying benefits will increase your monthly Social Security payments by 8% a year (plus annual inflation adjustments).

Hedging Your Bets

Single retirees should think about one other option: filing for and suspending Social Security benefits at age 66. By doing so you will be able to request a lump-sum payment for all the suspended benefits
anytime until age 70.

Even the best of plans can change, so that payment could come in handy if you face an emergency cash crunch. But there’s a downside: Once you request a lump sum, your payout will be valued as if you took benefits at 66, as will your regular monthly benefit going forward.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” was published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

 

TIME Taxes

Here’s How Unlikely It Is the IRS Will Actually Audit You

But fines and jail time still await tax frauds

Here’s something the IRS probably doesn’t want you to know: Our entire tax code mostly works on the honor system. The much-feared agency only audited 0.86% of individual tax returns in 2014, the lowest percentage since 2004, Bloomberg reports. Among households with incomes greater than $1 million, 7.5% were audited.

The auditing rate is falling because the IRS is bleeding employees. By 2014, the number of revenue agents had declined 16% from its 2010 peak, to 11,629. It’s a trend that IRS Commissioner John Koskinen called “deeply disturbing” in a Tuesday speech.

At its peak efficiency, the IRS was auditing about 1.11% of individual returns back in 2011. Even if those figures seem small, getting caught committing tax fraud can result in heavy fines or jail time—which seems to be enough to keep most citizens honest.

[Bloomberg]

MONEY Taxes

Why the IRS Won’t Audit Your Tax Return This Year

Although the IRS audit rate is at a 10-year low, certain items on your return will up the odds that your taxes get audited. Here's a brief guide.

TIME Taxes

Most Americans Say the Rich Aren’t Taxed Enough

taxes
Getty Images

And many claim the middle class pays too much

Tax season is here and more than two-thirds of Americans think the wealthy pay too little in federal dues, according to a new poll. What’s more, six in 10 say the middle class pays too much.

The Associated Press-GfK poll, which comes in the wake of President Barack Obama’s proposals in his 2016 budget to raise investment taxes on high-income American families, found overall that 56% of respondents think their own federal taxes are too steep.

It also found widespread support for specific tax-raising measures: A bid to raise capital gains taxes on households with incomes greater than $500,000 saw support at 56%, while only 16% opposed it. And a new tax on banks was supported by 47%, while only 13% opposed it.

The estate tax did not fare as well. Thirty-six percent opposed what would require estates to pay taxes on inherited assets, while 27% approved. Despite the poll’s apparent show of support for the President’s proposals, none are expected to win the support of the Republican-controlled Congress.

[AP]

MONEY Health Care

Obamacare Procrastinators Get Tax-Time Reprieve

healthcare.gov website
Don Ryan—AP

Americans have between March 15 and April 30 to enroll in a health plan and avoid paying a tax penalty.

The Obama administration said Friday it will allow a special health law enrollment period from March 15 to April 30 for consumers who realize while filling out their taxes that they owe a fee for not signing up for coverage last year.

The special enrollment period applies to people in the 37 states covered by the federal marketplace, though some state-run exchanges are also expected to follow suit.

People will have to attest that they first became aware of the tax penalty for lack of coverage when they filled out their taxes. They will still have to pay the fine, which for last year was $95 or 1% of their income, whichever was greater. This year, the penalty for not having insurance coverage is $325 per person or 2% of household income, whichever is greater. By signing up during the special enrollment period for 2015 they can avoid paying most of the tax penalty for this year.

The Affordable Care Act requires most Americans to have health insurance or pay a financial penalty. But some people may not realize they face a penalty for not having coverage until they file their tax returns ahead of the April 15 tax deadline.

The administration also said Friday it sent out the wrong information to 800,000 people to help them calculate whether they received too much of a subsidy for health coverage last year or too little. Those affected are being notified today by email or telephone—and are being asked to wait to file their taxes until after new 1095-A forms are sent in early March.

For the 5% of those affected who have already filed returns for 2014, more instructions are to come from the Treasury Department, officials said. The 800,000 represents about 20% of the total number of people who were sent 1095-A tax forms. Officials declined to say how the mistake occurred.

The administration would not estimate how many people it expects to take advantage of the new enrollment period. Millions of Americans who did not enroll in a plan are exempt from the requirement to buy coverage because their income is too little or they qualify for other exemptions. Officials said this special enrollment would be just for this year to account for people who did not hear or heed messages about the individual insurance mandate that was included in the health law approved by Congress in 2010.

So far, 11.4 million Americans have enrolled in private health insurance through Obamacare during the open enrollment period that ended on Sunday.

Separately, administration officials have said they will allow people who had trouble completing their enrollment by Feb. 15 to finish by Sunday Feb. 22. Officials estimated it would help fewer than 150,000 people.

Julie Appleby contributed to this story.

Kaiser Health News (KHN) is a national health policy news service. It is an editorially independent program of the Henry J. Kaiser Family Foundation.

MONEY payments

The U.S. Treasury Is Now Accepting PayPal

150219_EM_TreasuryPayPal
John Greim—LightRocket via Getty Images

But you can't use it to pay your taxes just yet.

What do eBay, Walmart, and the U.S. Treasury Department have in common? They all accept PayPal.

That’s the word from the Treasury Department, which announced on Wednesday that its Bureau of the Fiscal Service would begin accepting payments to federal agencies through both PayPal and Dwolla, an electronic payment network that lets users transfer money cheaply.

For now, the move exclusively affects Pay.gov, a website where citizens can pay things like court fees and Veterans Affairs health care co-payments, or donate to the National Endowment for the Arts. In other words, you can’t PayPal Uncle Sam your taxes just yet.

The new changes also appear to be limited in scope. In our own quick scan of Pay.gov, not every payment type listed PayPal and Dwolla as an option.

That said, the changes will still make a difference to a large number of Americans who were previously limited to debit and credit card payments. The Fiscal Service Bureau collected $3.73 trillion in fiscal year 2014 and processed 400 million transactions through multiple programs including Pay.gov. Adding more modern payment options should make government bills a little less painful for the site’s many users.

Beyond the immediate benefits, the news also shows the Treasury is slowly but surely entering the 21st century when it comes to moving money. Some of the fastest growing startups are centered on making transferring cash easier and more user friendly, and it’s nice to see the federal government isn’t totally oblivious to which way the wind is blowing.

“Digital wallets provide convenience, simplicity, and a trusted customer experience, while achieving cost effectiveness for the Federal Government,” said Corvelli McDaniel, assistant commissioner for revenue collections management for Fiscal Service, in a statement. “We are committed to operational excellence and continually improving our business processes; digital wallets help us achieve that goal.”

Today PayPal, tomorrow… Apple Pay?

MONEY Taxes

Don’t Make These 8 Classic Tax-Filing Fails

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Zachary Zavislak

These common mistakes can keep you from getting the refund you're owed.

Slipping up on your taxes can exact a high price. Some of the most frequently made blunders—silly things like entering the wrong Social Security number, spelling your name incorrectly, or putting in the wrong account numbers for direct deposit—hold up processing your return and any refund you might be due. That’s bad enough.

Other common mistakes cost you more than time. They cost you real money. Just by overlooking deductions, taxpayers give up an average of about $600 at tax time, according to research by Youssef Benzarti, an economics Ph.D. candidate at the University of California at Berkeley. He found that many people don’t itemize when they should—therefore passing over breaks such as the write-off for investment-related expenses. “Or,” says Benzarti, “they take only the easy deductions like mortgage interest and state taxes” and not harder-to-prove ones, such as charitable donations and use of a home office.

With April 15 fast approaching, MONEY consulted with a slew of tax pros to find out what other savings taxpayers like you typically miss. Review your return to make sure you don’t commit any of these costly errors.

1. Taking the wrong tax write-off for college

There are two mutually exclusive breaks you can use to ease the pain of paying for higher ed. People sometimes automatically take the $4,000 tuition and fees deduction because it sounds like the most money. But the $2,500 American Opportunity Tax Credit is typically a better deal,
says Melissa Labant, director of tax advocacy for the American Institute of CPAs. Here’s why: The tuition and fees deduction lowers the portion of your income subject to tax. “But a tax credit yields a dollar-for-dollar reduction in the taxes you owe,” says Labant.

You’re eligible for the full AOTC if you spend $4,000 on tuition and fees, as you can slash your taxes by 100% of the first $2,000 and 25% of the next $2,000. Also, your adjusted gross income must be $80,000 or less if single, $160,000 or less if married and filing jointly. (Partial credit is available for incomes up to $90,000 for singles and $180,000 for couples filing jointly.)

One caveat: You can’t take the AOTC for more than four years for any one dependent. So if your kid takes longer to graduate, you’ll be glad to have the tuition and fees deduction for year five.

2. Paying too much tax on investments you sold

At its simplest, your cost basis for figuring out the tax liability on an investment you’ve sold is the original price you paid for that investment. It’s subtracted from the price at which you sell in order to calculate capital gains or losses. Where it gets thorny is when you have to adjust your shares for such things as stock splits, reinvested dividends, capital gains distributions, and sales commissions.

Brokerages and mutual fund companies have been required to track cost basis for their customers since 2011 and 2012, respectively. But you have to calculate cost basis yourself on shares bought before those dates. Unfortunately, many investors forget to do that and end up paying more capital gains than they owe when they sell, says Kris Gretzschel, CPA and manager of the tax and financial planning team for Wells Fargo Advisors.

Say you purchased 100 shares of a stock for $100 per share and paid a $20 commission; your original cost basis is $10,020. Let’s assume you then received a $3-per-share dividend each year for five years that you automatically reinvested. Your new cost basis is $10,020 plus $1,500
($300 times five years) for the dividend, or $11,520. Now say you sell the stock for $18,000. Using the original cost basis instead of the adjusted one, you’d be paying taxes on $7,980 in gains vs. $6,480.

Online calculators like the one at CalcXML.com can help you tally up your cost basis. Or you can use a service like Netbasis.com, which charges $25 per transaction.

3. Leaving money on the table when changing jobs

High earners who had more than one employer during the year, this one’s for you. In 2014 each employer had to withhold 6.2% in Social Security taxes on the first $117,000 in income (the limit is $118,500 in 2015). “But that could lead the employers to withhold more taxes than you’re required to pay,” says Suzanne Shier, chief wealth planning and tax strategist for Northern Trust in Chicago.

Let’s say you worked for Company A for half the year and earned $62,000, then moved to Company B and earned $70,000. Each company would withhold taxes on your total earnings, but you should have paid taxes on only $117,000, not $132,000, and you would have overpaid by $930.

Tax prep software should catch this one, but paper filers may get snagged. Luckily, it’s an easy fix: “You can claim the money as a credit on line 71 of your 1040,” says Shier.

4. Blanking on what you saved

It’s not uncommon to forget money socked away in an IRA the previous year, especially since your broker doesn’t send you paperwork confirming contributions (IRS Form 5498) until after you file your taxes.

But if you forget to report a contribution to a traditional IRA and you qualify for a deduction—see IRS Publication 590-A—you will miss a break on your current taxes. If the contribution is nondeductible, you still need to file Form 8606 so that you don’t pay income taxes on a portion
of your withdrawals during retirement, notes Gretzschel. So call your brokerage to refresh your memory about 2014 contributions.

5. Missing out on money back for your home office

Moonlighters often opt to forgo the home-office deduction, both because it’s a hassle to keep track of the paperwork and because they’re worried about putting up red flags to IRS auditors.

As of last year, however, an alternative, simplified version of the write-off allows you to deduct $5 per square foot of office space up to $1,500 with no documentation whatsoever. Unlike the old method of calculation, no depreciation is taken on your home, which means the break will not affect capital gains when you sell, says Eric Bell, a CPA with Jones & Roth in Eugene, Ore.

6. Overpaying taxes on retirement distributions

People 70 or older and retired are required to withdraw certain amounts of money from 401(k)s and IRAs each year. When you begin receiving distributions, you have the option to have income taxes withheld. Call it a senior moment, but retirees sometimes forget that they chose to have taxes taken out, says Gretzschel.

They don’t look closely enough at the 1099-R forms and therefore don’t input the taxes paid into their 1040. As a result, they could end up paying the taxes twice—and the IRS may or may not catch the mistake, Gretzschel says.

7. Overlooking online largess

There’s been a big increase in online charitable giving, but many people forget to save emailed receipts as they do ones that come in the mail. “If you don’t have an organized electronic life, it’s hard to get receipts together,” says Shier.

She recommends searching your email in-box for “gift” and “donation.” If you are in the 28% bracket and discover $250 more in donations to report, you’ll reap $70 in tax savings.

8. Ignoring the write-off that is right in your hands

Those who itemize can write off certain investing and tax expenses—including tax-prep software, financial adviser fees, and rent on a safe-deposit box where you store securities—that exceed 2% of your adjusted gross income.

Bell says that those most likely to overcome the 2% hurdle on these “miscellaneous expenses” have modest income but a fairly large taxable portfolio that they pay an adviser to manage; many retirees who super-saved fit that bill. If you have an AGI of $100,000 and you have
$5,000 in investment-adviser fees (equating to 1% on a $500,000 portfolio), you’ll have to exclude the first $2,000, but can deduct the remaining $3,000.

While calculating your costs, don’t forget that you can add subscriptions to professional publications, business magazines, and investing magazines—including the one you’re reading now.

More from the 2015 Tax Guide:
The IRS Could Audit You For Doing This
7 Ways to Keep Your Tax Refund Safe From Thieves
Where to Get Free Tax-Prep Help

 

MONEY IRAs

The Retirement Investing Mistake You Don’t Know You’re Making

The investor rush to beat the April 15 deadline for IRA contributions often leads to bad decisions. Here's how to keep your investments growing.

It happens every year around this time: the rush by investors to make 11th-hour contributions to their IRAs before the April 15 tax deadline.

If you’ve recently managed to send in your contribution, congrats. But next time around, plan ahead—turns out, this beat-the-clock strategy comes at a cost, or a “procrastination penalty,” according to Vanguard.

Over 30 years, a last-minute IRA investor will wind up with $15,500 less than someone who invests at the start of the tax year, assuming identical contributions and returns, Vanguard calculations show. The reason for the procrastinator’s shortfall, of course, is the lost compounding of that money, which has less time to grow.

Granted, missing out on $15,500 over 30 years may not sound like an enormous penalty, though anyone who wants to send me a check for this amount is more than welcome to do so. But lost earnings aren’t the only cost of the IRA rush—last-minute contributions also lead to poor investment decisions, which may further erode your portfolio.

Many hurried IRA investors simply stash their new contributions in money-market funds—a move Vanguard calls a “parking lot” strategy. Unfortunately, nearly two-thirds of such contributions are still stashed in money funds a full 120 days later, where they have been earning zero returns. So what seems like a reasonable short-term decision often ends up being a bad long-term choice, says Vanguard retirement expert Maria Bruno.

Why are so many people fumbling their IRA strategy? All too often, investors focus mainly on their 401(k) plan, while IRAs are an after-thought. But fact is, most of your money will likely end up in an IRA, when you roll out of your 401(k). Overall, IRAs collectively hold some $7.3 trillion, the Investment Company Institute (ICI) found, fueled by 401(k) rollovers—that’s more than the money held in 401(k)s ($4.5 trillion) and other defined-contribution accounts ($2.2 trillion) combined.

Clearly, having a smart IRA plan can go a long way toward improving your retirement security. To get the most out of your IRA—and avoid mistakes—Bruno lays out five guidelines for investors:

  • Set up your contribution schedule. If you can’t stash away a large amount at the start of the year, establish a dollar-cost averaging program at your brokerage. That way, your money flows into your IRA throughout the year.
  • Invest the max. You can save as much as $5,500 in an IRA account in 2015. But for those 50 and older, you can make an additional tax-deferred “catch up” contribution of $1,000. A survey of IRA account holders by the ICI found that just 14% of investors take advantage of this savings opportunity. (You can find details on IRS contribution limits here.)
  • Select a go-to fund. Skip the money fund, and choose a target-date retirement fund or a balanced fund as the default choice for your IRA contributions. You can always change your investment choice later, but meantime you will get the benefits—and the potential growth—of a diversified portfolio.
  • Invest in a Roth IRA. Unlike traditional IRAs, which hold pre-tax dollars, Roths are designed to hold after tax money, but their investment gains and later payouts escape federal income taxes. With Roths, you also avoid RMDs (required minimum distributions) when you turn 70 ½, which gives you more flexibility. Vanguard says nine out of every 10 dollars contributed to IRAs by its younger customers under age 30 are flowing into Roths. Here are the IRS rules for 2015 Roth contributions.
  • Consider a Roth conversion. High-income earners who do not qualify for tax-deferred Roth contributions can still make post-tax contributions to an IRA and then convert this account to a Roth. The Obama Administration’s proposed 2016 federal budget would end these so-called backdoor Roth conversions, which have become very popular. Of course, it’s far from clear if that proposal will be enacted.

Once you have your IRA set up, resist tapping it until retirement. The longer you can let that money ride, the more growth you’re likely to get. Raiding your IRA for anything less than real emergency would be the worst mistake of all.

Philip Moeller is an expert on retirement, aging, and health. His latest book is “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: 25 Ways to Get Smarter About Money Right Now

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