MONEY Ask the Expert

Which Wins for Retirement Savings: Roth IRA or Roth 401(k)?

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 30 and just starting to save for retirement. My employer offers a traditional 401(k) and a Roth 401(k) but no company match. Should I open and max out a Roth IRA first and then contribute to my company 401(k) and hope it offers a match in the future?– Charlotte Mapes, Tampa

A: A company match is a nice to have, but it’s not the most important consideration when you’re deciding which account to choose for your retirement savings, says Samuel Rad, a certified financial planner at Searchlight Financial Advisors in Beverly Hills, Calif.

Contributing to a 401(k) almost always trumps an IRA because you can sock away a lot more money, says Rad. This is true whether you’re talking about a Roth IRA or a traditional IRA. In 2015 you can put $18,000 a year in your company 401(k) ($24,000 if you’re 50 or older). You can only put $5,500 in an IRA ($6,500 if you’re 50-plus). A 401(k) is also easy to fund because your contributions are automatically deducted from your pay check.

With Roth IRAs, higher earners may also face income limits to contributions. For singles, you can’t put money in a Roth if your modified adjusted gross income exceeds $131,000; for married couples filing jointly, the cutoff is $193,000. There are no income limits for contributions to a 401(k).

If you had a company match, you might save enough in the plan to receive the full match, and then stash additional money in a Roth IRA. But since you don’t, and you also have a Roth option in your 401(k), the key decision for you is whether to contribute to a traditional 401(k) or a Roth 401(k). (You’re fortunate to have the choice. Only 50% of employer defined contribution plans offer a Roth 401(k), according to Aon Hewitt.)

The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. With a traditional 401(k), you make contributions with pre-tax dollars, so you get a tax break up front, which helps lower your current income tax bill. Your money—both contributions and earnings—will grow tax-deferred until you withdraw it, when you’ll pay whatever income tax rates applies at that time. If you tap that money before age 59 1/2, you’ll pay a 10% penalty in addition to taxes (with a few exceptions).

With a Roth 401(k), it’s the opposite. You make your contributions with after-tax dollars, so there’s no upfront tax deduction. And unlike a Roth IRA, there are no contribution limits based on your income. You can withdraw contributions and earnings tax-free at age 59½, as long as you’ve held the account for five years. That gives you a valuable stream of tax-free income when you’re retired.

So it all comes down to deciding when it’s better for you to pay the taxes—now or later. And that depends a lot on what you think your income tax rates will be when you retire.

No one has a crystal ball, but for young investors like you, the Roth looks particularly attractive. You’re likely to be in a lower tax bracket earlier in your career, so the up-front tax break you’d receive from contributing to a traditional 401(k) isn’t as big it would be for a high earner. Plus, you’ll benefit from decades of tax-free compounding.

Of course, having a tax-free pool of money is also valuable for older investors and retirees, even those in a lower tax brackets. If you had to make a sudden large withdrawal, perhaps for a health emergency, you can tap those savings rather than a pre-tax account, which might push you into a higher tax bracket.

The good news is that you have the best of both worlds, says Rad. You can hedge your bets by contributing both to your traditional 401(k) and the Roth 401(k), though you are capped at $18,000 total. Do this, and you can lower your current taxable income and build a tax diversified retirement portfolio.

There is one downside to a Roth 401(k) vs. a Roth IRA: Just like a regular 401(k), a Roth 401(k) has a required minimum distribution (RMD) rule. You have to start withdrawing money at age 70 ½, even if you don’t need the income at that time. That means you may be forced to make withdrawals when the market is down. If you have money in a Roth IRA, there is no RMD, so you can keep your money invested as long as you want. So you may want to rollover your Roth 401(k) to a Roth IRA before you reach age 70 1/2.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: The Pros and Cons of Hiring a Financial Adviser

MONEY retirement income

Why Are States Leaving Billions in Retiree Income on the Table?

Many elderly can afford to pay more in taxes. And with a growing number of needy seniors to support, states can't afford to pass up that revenue.

Illinois is the national poster child for state budget messes. My home state faces a $7.4 billion general fund deficit and a $12 billion revenue shortfall. One proposed idea for plugging at least part of the horrific shortfall: tax retirement income. But our new governor, Republican Bruce Rauner, has rejected the idea.

Illinois exempts all retirement income from state taxes—Social Security, private and public pensions, and annuities. We’re leaving $2 billion on the table annually, according to the state’s estimates. And we’re hardly alone: 36 states that have an income tax allow some exemption for private or public pension benefits, and 32 exempt all Social Security benefits from tax, according to the Institute on Taxation and Economic Policy (ITEP). States currently considering wider income tax exemptions for seniors include Rhode Island and Maryland.

With the April 15 tax day just around the corner, it’s a timely moment to ask: What are these politicians thinking?

Income tax exemptions date back to a time when elderly poverty rates were much higher than they are today (federal taxation of Social Security began in the 1980s). As recently as 1970, almost 25% of Americans older than 65 lived in poverty, according to the Census Bureau; now it’s around 9%. Today, it still makes sense to tread lightly on vulnerable lower-income seniors, many of whom live hand to mouth trying to meet basic expenses. And the number of vulnerable seniors is on the rise.

MORE SENIORS

But much of the benefit of state retirement income exemptions goes to affluent elderly households. The cost of these exemptions is high, and it’s going to get higher as our population ages. In llinois, the number of senior citizens is projected to grow from 1.7 million in 2010 to 2.7 million by 2030. That points to a demographic shift that will mean a shrinking pool of workers will be funding tax breaks for a growing group of retirees.

So there’s a real need for states to target these tax breaks to seniors who really need them. Yet one of the plans floated in Rhode Island would exempt all state, local and federal retirement income, including Social Security benefits—from the state’s personal income tax. The Social Security proposal is an especially good example of a poorly targeted break.

Currently, Rhode Island uses the federal formula for taxing Social Security, which already protects low-income seniors from taxes. Under the federal formula, beneficiaries with income lower than $25,000 ($32,000 for couples) are exempt from any tax (income here is defined as adjusted gross plus half of your Social Security benefit). Up to 50% of benefits are taxed for beneficiaries with income from $25,000 to $34,000 ($32,000 to $44,000 for married couples). For seniors with incomes above those levels, up to 85% of benefits are taxed.

If Rhode Island decides to exempt all Social Security income from taxation, more than half of the benefit will flow to the wealthiest 20 percent of taxpayers, according to an ITEP analysis.

“The poorest seniors in Rhode Island wouldn’t get a dime from this change, because they already don’t pay state taxes on Social Security,” says Meg Wiehe, ITEP’s state tax policy director.

WORKING LONGER

Another tax fairness issue is inequitable treatment of older workers and retirees. The percentage of older workers staying in the labor force beyond traditional retirement age is rising—and many of them are sticking around just to make ends meet. Those workers are bearing the full state income tax burden, effectively subsidizing more affluent retired counterparts.

Some tax-cut advocates might argue that breaks for seniors will help retain or attract residents to their states. But numerous studies show that few seniors move around the country for any reason at all. Just 50% of Americans age 50 to 64 say they hope to retire in a different location, according to a recent survey by Bankrate.com, and the rate drops to 20% for people over 65.

For those who do move, taxes are a consideration—but not the only one.

“A lot of factors go into the decision,” says Rocky Mengle, senior state analyst at Wolters Kluwer, Tax & Accounting US. “Climate, proximity to family and friends are all very important, along with the overall cost of living. But I’d certainly throw taxes into the mix as a consideration.”

Smart tax policy makers and politicians should take all these factors into consideration—especially in states that are facing crushing deficits and debt burdens. Targeted exemptions for vulnerable seniors make sense, but the breaks should be affluence-tested.

“The scales would vary state to state,” says Wiehe. “But a test that makes sure taxation isn’t a blanket giveaway with most of it going to the most affluent households.”

Indeed. In the golden years, not all the gold needs to go to the rich.

Read next: 1 in 3 Older Workers Likely to Be Poor, or Near Poor, in Retirement

MONEY Taxes

450 Billion Reasons Why John Oliver Is Right About the IRS

Last Week Tonight With John Oliver
Eric Liebowitz—HBO/Courtesy Everett Collection

The Last Week Tonight host argues for increasing the IRS's budget. Here's why doing so could save taxpayers money in the long run.

On last night’s Last Week Tonight, John Oliver made news with an argument he acknowledged many viewers might find hard to believe: The Internal Revenue Service, the most maligned of all government organizations, needs more money, not less.

The whole segment is worth watching. (Mostly safe for work, depending on where you work. Maybe use headphones.) But the key point is that the IRS has had its funding cut by about 10% in the last five years, and by nearly 20% if you adjust for inflation. In that same time period, the IRS has also significantly cut enforcement staff.

 

So what if enforcement is weaker? It may mean more people are getting away with paying less than they owe. Every five years, the IRS calculates what’s known as the “tax gap”—the amount of taxes owed minus what is actually paid—and the results are a pretty ugly. The most recent report, produced in 2012 for tax year 2006, puts the tax gap at $450 billion dollars. (The gap shrinks to “only” $385 billion once you take into account late payments and money recouped through enforcement.) Think of it like this: Every dollar someone gets out of paying ultimately has to be made up by the rest of us taxpayers, in the form of higher taxes.

It’s important to note that closing this entire tax gap is likely impossible. The U.S. tax system is build on voluntary compliance, and a very large portion of the government’s losses come from people underreporting their incomes from sources that are hard to verify, such as a self-employed person understating profits.

Detractors have argued the IRS shouldn’t get more funding until it improves its performance. The agency has been rocked by allegations that it targeted conservative non-profit groups in delaying their tax exempt status, and Republicans, like Senator Rob Portman, still harbor deep mistrust toward the agency.

That said, the Treasury Department estimates a $1 investment in the IRS’s enforcement ability returns $6 in revenue, and that’s not counting the deterrent effect on potential cheats, which Treasury says may be three times higher. Finding a way to close just a small portion of the tax gap would save the public huge amounts of money.

Read Next: 3 Ideas That Could Make the Tax System Work Better for Everyone

MONEY Taxes

You’re Not Paying Enough in Taxes on These 7 Things

junk food (candy, soda and chips)
iStock

That's what proponents of various tax hikes, or entirely new taxes, would have you believe.

The last thing most consumers want to hear—especially around April 15—is that they should be paying more in taxes. But for a wide range of reasons, including health, safety, fairness, the environment, and simply raising more funds for government projects and infrastructure, some say higher taxes are needed in the following categories.

Alcohol
“In 1951, the federal excise tax on a standard shot of 80-proof whiskey was about 90 cents in today’s dollars. Today it stands at about 13 cents, a seven-fold decrease,” the Washington Post noted recently. “The real federal beer tax has fallen about fivefold over the same period, with a more modest drop for wine.”

That and other articles point to new research from the University of Florida, which shows that higher alcohol taxes can save lives—because people drink less when booze costs more. “Alcohol tax increases implemented across the country could prevent thousands of deaths from car crashes each year,” said Alexander C. Wagenaar, a UF College of Medicine professor and one of the researchers involved in the study.

Junk Food
Commonly referred as a junk food tax, the Healthy Dine Nation Act went into effect on April 1 in the Navajo Nation, which extends into parts of Arizona, Utah, and New Mexico. The law adds a 2% tax on chips, fried foods, soda and other sweetened beverages, and other products with “minimal-to-no-nutritional value.” Funds raised from the tax are supposed to be allocated to health initiatives, including exercise facilities and community gardens. The tax is also aimed at dissuading people from eating poorly—diabetes, hypertension, and cardiovascular disease are all big problems on the reservation.

The idea of a state or national junk food or “fat tax” surfaces from time to time, with proponents calling special attention to how costly obesity is. “America spends $96 billion treating diseases caused by cigarette smoking—far less than the $190 billion spent on obesity,” the Committee for Economic Development noted last fall. Yet some research indicates that to be noticeably effective in changing consumer behavior, a junk food tax has to be big, perhaps 20% or higher.

Soda
While a blanket junk food tax would include soda and sweetened beverages, some health advocates specifically target soda as especially appropriate for a new tax. The nation’s first soda tax was passed in Berkeley, Calif., last fall, and lawmakers in San Francisco have been trying to reduce soda consumption, via possible taxes and package warnings among other measures. Several other cities have tried (but failed) to institute soda taxes, and we’ll have to wait and see if Berkeley is a trendsetter or an oddball anomaly. One 2014 study suggests that a tax equivalent to 6¢ on each 12-ounce soda would significantly curb soda consumption.

Gas
The idea of hiking gas taxes has grown more popular since gas prices collapsed in the U.S. The national gas tax hasn’t budged since 1993, and the thinking is that people will be more open to higher gas taxes at a time when the cost of gas is cheap. Forecasts call for gas prices to stay low indefinitely, and that makes it more likely that a gas tax increase will happen.

Driving
One problem with taxing gas is that today’s drivers use less of it, thanks to the rise of alternative-fuel cars and across-the-board improvements in fuel efficiency. After all, when people use less gas, they pay less in gas taxes too, and plummeting gas taxes collected means that there are fewer funds to keep our highway infrastructure from crumbling further.

One frequently suggested alternative to taxing gas is taxing miles driven. This concept is riddled with unknowns, but we should all know more about how such a system would work in the near future. An experiment charging a few thousand drivers 1.5¢ per mile gets under way in Oregon starting this summer.

E-cigarettes
According to a 2015 Pew Charitable Trusts study, two states already tax e-cigarette sales (North Carolina and Minnesota), and proposals to add e-cigarette taxes have been on the table in at least a dozen more states. Among them, Ohio is considering a tax that would effectively triple the current cost of electronic cigarettes.

Online Shopping
Last month, a group of U.S. senators introduced a new version of the Marketplace Fairness Act, which would allow states to collect sales tax on purchases made in other states. Somewhere between one-half and three-quarters of American consumers already pay sales tax on Amazon.com purchases, but there are many examples of online purchases that still aren’t taxed.

“The free ride,” as a recent Pittsburgh Post-Gazette editorial called it, “comes at a cost: a decline in tax revenue, with a corresponding decline in government service, and a system that unfairly favors online retailing behemoths at the expense of brick-and-mortar stores close to home.”

MONEY Taxes

How Your Kids Can Help Cut Your Tax Bill

father with son at daycare
Sandro Di Carlo Darsa—Getty Images A little bundle of potential tax breaks.

As you rush to finish your tax return this year, don't overlook the ways your children (or grandchildren) can save you money.

As a busy parent, you may feel fortunate just to finish your income tax returns by April 15, let alone find the time to investigate ways to reduce your state and federal income tax bills

But devoting a few extra minutes of your precious time to these potential tax breaks could save hundreds or thousands of dollars on what you owe to Uncle Sam for 2014, as well as in the years to come.

1. Think Broadly About Who Depends on You

Each dependent you declare on your 2014 tax return can reduce your taxable income by $3,950. In the 25% federal tax bracket, that’s a tax savings of almost $1,000. And the IRS allows a broader scope of this definition than what you might imagine.

The dependent must be a U.S. citizen or resident and can’t be declared as a dependent by anyone but you. He also can’t file a joint tax return with someone else (i.e. the dependent’s spouse).

Children have to be related to you via birth, adoption, “step-” status, or under certain types of foster care. Children of all of these people (i.e. your grandchildren) may qualify as your dependents as well, if the other standards are met.

Qualifying dependents usually have to live with you for at least half of the year, and be under age 19 (age 24 if they are full-time students). Although they can earn money, you have to provide at least half of their support.

2. Make Sure Your Child Has a Social Security Number

With the child tax credit, you can reduce your tax bill by as much as $1,000 for every child under your care who was under age 17 at the end of 2014—if you meet a few conditions.

You must be able to claim the child as a dependent, and she can’t have provided more than half of her support. She also must have lived with you for at least half of the year.

Last but not least, she must have a federal taxpayer identity number (usually the child’s Social Security number), so this is a good motivator for parents of a newborn baby to get going on that process as soon as possible.

Your ability to claim this credit may also be limited by your income. For married couples filing jointly, the credit starts to be phased out when modified gross income (MAGI) hits $110,000 ($75,000 for single filers).

Also, you have to file form 1040, 1040A, or 1040NR to receive the credit—using the 1040EZ form won’t cut it. For more information download Publication 972 and Schedule 8812 at IRS.gov.

3. Don’t Overlook Any Helpers

The child and dependent care credit delivers another big tax cut to parents who work outside of the home and pay someone to care for children who were age 12 and under at the end of the tax year. Money paid to caregivers who are your spouse, the child’s parent, a dependent of yours, or your child is not eligible.

The limit on qualifying expenses is $3,000 for one child, and $6,000 total for multiple children. The tax credit ranges from 20% to 35% of the qualifying amount, depending on your income.

The expense can’t exceed the lesser of your (or your spouse’s) earned income. If you withhold any pre-tax funds from your paycheck to a dependent day care flexible spending account, you must use any tax-free distributions from that account against the $3,000/$6,000 limits of the tax credit.

Best of all, as long as your situation meets the aforementioned criteria, you can include last summer’s day camp expenses in the total, even if the camp focused on a particular athletic or skill development. Unfortunately, overnight camp costs, summer school, and tutoring expenses don’t qualify.

For more information download Publication 503 (Child and Dependent Care Expenses) at IRS.gov.

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire.

MONEY Taxes

What Happened When I Did My Taxes With My 10-Year-Old

What I learned about my kid—and what she learned about money—when we filled out the Form 1040 together.

This past weekend, I asked my 10-year-old daughter Lucy to help me do our family’s taxes. She read off from my W-2 and our 1099 forms as I filled in the boxes on the tax prep website we use. This meant, of course, that she got to see exactly how much her parents earn.

I expected that this was going to feel like the Big Reveal of a closely guarded secret. As I probably should have known, the numbers at first meant nothing to her. Annual incomes are an abstraction to a kid who has never written a rent check.

The real talk came a couple of days later, when Lucy and I had a chance to look over the actual 1040 I sent to the IRS, and I could show her how it all fit together. I’m glad we did that.

Before I get that to that conversation, though, a word about why I decided to do this. I was inspired in part by New York Times columnist Ron Lieber’s case for telling your children what you make. As Lieber points out, kids have a knack for figuring this out anyway. And showing them how you handle money—even when (believe me) you are far from perfect at it—can be a first step toward showing them how to be competent with it themselves.

I was also motivated by a more cranky-old-man impulse: I’ve been surprised by the number of young adults I meet who don’t know how to do their own taxes. To me, knowing how to fill out a 1040 is a just a basic life skill everyone should have by 18. I know this is more sentimental then reality-based. After all, I also put driving a stick shift in this category. And for years I’ve been farming out the hard work of my own taxes to the H&R Block website. (Thanks, AMT.)

Still, I remember that I was in the eighth grade, our teacher Sister Loretta had students fill out 1040s using mock W-2s as a math exercise. She was cracking the door on the adult world a little bit wider. Kids are always eager for those peeks, and when they get one, they seem especially open to learning. And talking.

For me and Lucy, the tax talk turned into one of the most impressively grown-up discussions we’ve ever had. She saw what we make, and I tried to put that in the context of what other Americans earn. She also saw what we pay, and so then we turned to where that money goes and what it’s used for. I tied the conversation in to a news story I read that day, about legislation in Kansas that would bar families on public assistance from spending that money on a long list things, including casinos, but also movie tickets and trips to the swimming pool. We talked about why some families need financial help, and why people have such strong opinions about that.

Lucy doesn’t need me sharing her nascent political views with the world, so I’ll just say that she surprised me (the way kids do) with her insights about what’s fair and about the choices people should have. Her ideas seemed too thought-out for her to just be parroting back what she guessed I’d like to hear. So I learned something about my daughter. And my wife and I also had a chance to articulate some of the values we are trying to pass on to our kids.

Lucy also asked a simple but very good question about our own money: “So this is how much you made, but how much do you have?” The distinction between making money and actually having any is an important one, and these days in our family we are frankly doing better on the former than the latter. Turning from our income tax forms to our savings, I was able to at least hint at some of the tricky choices her mom and I are trying to juggle.

Lucy didn’t get a “wow” moment of understanding from this, but I think I laid the groundwork for future discussions of things we have to be realistic about. Like how we’ll pay for Lucy to go to college, and where she’ll be able to go. And why (to hit on a question that’s really on her mind) she still has to share a room with her little brother.

I was able to have this conversation from a standpoint of some comfort. For a lot of parents, opening up about money means talking about losing a job, or how they’re dealing with a foreclosure, or how they’re going to buy the groceries this week. Those are much tougher things to talk about. But starting from where we are, and knowing we’ll have some ups and downs in the future, I think I’m glad that for my daughter this part of real life is already a little less mysterious.

MONEY Viewpoint

Taxpayers Should Stop Subsidizing “Country Club” Colleges

An education policy expert argues that it's time for more elite colleges to open their doors to low-income students.

For years, Washington University in St. Louis has held the dubious distinction of being the least socioeconomically diverse college in the country.

Just 85 members of its freshmen class entering in the fall of 2012 (5%) came from families with incomes low enough (typically below $50,000 a year) to qualify for a federal Pell Grant. (That’s the most recent year with federal data available.)

Washington University’s proportion of low-income students is remarkably tiny, considering more than a third of all full-time undergraduates qualify for the need-based Pell Grants. It’s also low for schools with tough academic standards. Other elite colleges maintain top reputations while providing many more opportunities to the non-rich: About a third of the students at the University of California-Berkeley—generally considered one of the top universities in the world—qualify for Pell Grants, for example. And more than 20% of students at elite schools like Amherst College and Columbia University come from low-income families.

Adding financial injury to this insult: “country club” private colleges that bar the door to the poor—thus reinforcing socioeconomic inequality—are receiving large tax subsidies from you and me, in part because of their tax-exempt status.

But there finally may be a little good college opportunity news on the horizon. Perhaps in response to the growing criticism of taxpayer subsidies of such country club colleges, some schools like Washington University are starting to at least inch towards providing more opportunities.

This January, Washington University announced a plan to double the proportion of Pell Grant recipients that it enrolls by 2020. Under the plan, Wash U. will spend at least $25 million a year for five years to increase the share of students who qualify for Pell Grants.

“Improving the socioeconomic diversity of our student body is not just important; it’s critical to our success as a university,” Holden Thorp, the university’s provost and executive vice chancellor for academic affairs, said in a news release.

Four other private colleges that currently have low-income populations of only about 10% tell me they are also now working to recruit more low-income students.

Some of the colleges say the problem—and solution—boils down to money.

Officials at Whitman College in Walla Walla, Wash., for example, say one key reason their student body is currently only 10% low-income is that the financial crisis of 2008 reduced their endowment, which is used to fund financial aid. They are now trying to raise more money for scholarships so a more diverse group of students can afford to attend the school. “We have a responsibility to increase access wherever we can,” says school president George Bridges, who is leaving Whitman at the end of the school year to become president of The Evergreen State College in Olympia, Wash.

Likewise, Elon University, in North Carolina, is in the middle of a 10-year campaign to double the amount of need-based institutional aid that it awards. “Elon must not become a gated community open only to those of privilege,” the college states on its website, “and our classrooms and campus life will be much richer when we recruit more students from diverse backgrounds who challenge and lead us by sharing their own life stories…” Because of the difficulty of raising the large sums needed, however, Elon is making “slow progress” in increasing the proportion of Pell students it enrolls, says President Leo Lambert. “We are digging hard into this issue of access, because it makes a big difference in the quality of the kind of community we aspire to be,” he says.

Other colleges are combining fundraising with new recruiting efforts. Colorado College is raising more money for financial aid and partnering with nonprofits such as QuestBridge to recruit low-income historically underrepresented students. “We are really diversifying the pool of highly qualified low-income students that we enroll,” says president Jill Tiefenthaler.

And Kenyon College, in Gambier, Ohio, is increasing its diversity in part by changing its application. In 2013, Kenyon simplified its admissions application, removing extra essays that the school found discouraged first-generation students. It seems to be working: For next year’s incoming class, Kenyon admitted 408 minority students, up 9% from last year, and 128 first-generation college students, the second most the college has admitted in the last decade. “It’s clear to us that we can do better than where we are and where we’ve been in recent years,” says Sean Decatur, Kenyon’s president.

But this battle is far from won. There are still plenty of other colleges that aren’t making an effort to provide opportunities to more than a handful of lucky low-income students. “Just trying to increase the number of Pell Grant recipients might be good for PR, but may be bad policy for our college,” says Randy Helm, the outgoing president of Muhlenberg College, a private college in Pennsylvania where only 8% of the students come from low income families.

Part of the reason is financial. Washington University can afford to spend more on financial aid, since its endowment equates to about $500,000 per student. Muhlenberg’s endowment equates to one-tenth of that: $50,000 per student.

Helm, who is retiring in June, doesn’t think it would be healthy for Muhlenberg to make a concerted effort to recruit and finance substantially more Pell-eligible applicants. If it did, the school would have to spend its entire $36 million financial aid budget supporting them, and wouldn’t have any aid left for middle-income students who are also struggling to pay the school’s $55,000 annual cost of attendance.

“We’re not going to be a school that serves the very, very rich and the very, very poor,” he says. “I don’t think that would be fair to middle-income students, the college, or the country.”

Another reason for the lack of college opportunities may be the pursuit of prestige. Muhlenberg, for example, devotes a significant share of its institutional aid to the pursuit of high-achieving students, who often come from well-to-do families.

A page on Muhlenberg’s website, entitled “The Real Deal on Financial Aid,” acknowledges that the college and many of its competitors often use institutional aid as a “recruiting tool.” “It used to be that you could try for that reach school and if you got in, you didn’t have to worry because everybody who got in, who needed money, got money,” the college’s financial aid office states. “Today, however, as colleges are asked to fund more and more of their own operation with less and less assistance from government, foundations, and families, they are increasingly reluctant to part with their money to enroll students who don’t raise their academic profile.”

Muhlenberg provides “merit aid”—which is not based on financial need—to about 32% of its freshmen, with an average award of nearly $12,500 per student, according to data the college reports to magazines that publish college rankings.

Higher education researchers, the news media, and even the White House have been putting colleges on notice that they must do a better job serving low-income students. It’s encouraging to see that this pressure has been pushing some of the biggest laggards to make progress in this area. Those colleges that continue to hold out, however, deserve additional scrutiny. At a time of growing inequality, we can no longer afford to subsidize colleges that cater to the rich at the expense of the poor.

(Here are Money’s lists of the Most Generous Colleges and the 25 Best Colleges You Can Actually Get Into.)

Stephen Burd is a senior policy analyst with New America’s Education Policy Program. This story was produced by The Hechinger Report, a nonprofit, independent news website focused on inequality and innovation in education.

MONEY Taxes

These are the States Where You’ll Pay the Most (or Least) Taxes

A new report from WalletHub says those states with the lowest tax burdens tend to be on the west coast.

MONEY Taxes

Last-Minute Tax Filers: Beware of This Obamacare Scam

pill bottles with money in them
Adrianna Williams—Getty Images

If you don’t have health coverage, you pay a penalty to the government. And scammers are ready to take advantage of that.

For all stripe of rip-off artist, tax season might as well be called open season. Scams are legion, and navigating a solution after the fact can be somewhere between maddening and negotiating an Iran deal that everyone likes. Last month the IRS issued a warning that received scant attention from the media, but nonetheless could impact millions of taxpayers this year — particularly targeting low-income, elderly and Spanish-speaking taxpayers.

The scam takes advantage of the Individual Shared Responsibility Provision of the Affordable Care Act. It’s a penalty, but one with many exemptions. Because it is somewhat complicated, the new provision has become the object of many fraudsters’ affections, especially during tax season.

This is the first year that taxpayers must confront this new liability. In the simplest of terms, if you don’t have health coverage, you pay a penalty to the government.

The provision is intended to induce people to get coverage, since individual shared responsibility is all about increasing the number of Americans enrolled in health insurance plans in order to enlarge the pool to spread risks and reduce costs. Regardless of what you think of that theory, that’s the informing principle.

So what is the penalty? While at first blush it doesn’t sound like a huge amount of money, it’s not nothing either — especially to a family who is forced to live paycheck to paycheck. It can be 1% of a family’s annual income (minus the tax return filing threshold for your filing status), with a maximum penalty being the national average cost of a bronze plan, or it can be calculated as $95 per adult and $47.50 per child under the age of eighteen, capping out at $285 for a family. The amount per adult will increase each year. In 2016, it will be $695 per adult and $347.50 per child, capping at $2,085 per family.

For an unscrupulous tax preparer the Shared Responsibility penalties can add up to quite a caper. How so? Because the scam involves A) taking advantage of the inherent complexity of the exemptions and B) pocketing the penalties. Sometimes the scammer claims he or she can reduce the cost of the penalty because they have created a pool for leverage, or they simply claim that paying them directly instead of the government is “how it’s done.”

The only thing you need to know is: That’s not how it’s done. The easiest way to avoid this scam is to remember one rule: Only pay the IRS. Period.

There is some good news. While you are required to report whether or not you have health care coverage on your tax return, the majority of filers will not have an issue here. It has been estimated that only four million of the estimated 30 million uninsured will have to pay the Shared Responsibility Provision in 2016. But here is where fraudsters see their honey pot, using complexity to fleece honest taxpaying citizens while exposing them to penalties when the IRS circles back to get money that was stolen from them.

Are you off the hook for paying the penalty? Here’s the list of exemptions to see if they might apply to you (consult your tax preparer as this column is not meant to serve as a substitute for professional tax advice):

  • There were no “affordable” options for you, because available annual premiums were in excess of 8% your household income.
  • You had a gap in coverage less than three consecutive months.
  • Your household income was below the return-filing threshold ($10,150 for an individual on a 2014 tax return).
  • You are not a U.S. citizen, a U.S. national, nor an alien lawfully present in the United States.
  • You belong to a health care sharing ministry.
  • You belong to a federally-recognized Native American tribe.
  • You are in a jail, prison or another qualifying institution — such as a psychiatric hospital, etc.
  • You belong to a qualifying religion existing prior to December 31, 1950, recognized by the Social Security Administration (SSA).
  • You qualify for a hardship exemption.

Hopefully it’s not news that you need to choose a tax preparer wisely. There are many fly-by-night operations that are literally gone in the blink of an eye the minute April 16th rolls around.

That said, most tax preparers work hard to get you the best possible refund (or the lowest possible amount due) while remaining scrupulous and sticking to the letter of the law—and that is no easy task given the complexity of the Internal Revenue Code of 1986. If you are unsure about a tax preparer, you should ask for references or, even better, consult the IRS’s searchable database of tax preparers that are recognized by the agency.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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This article originally appeared on Credit.com.

MONEY Taxes

Here’s What to Do If You Can’t Finish Your Taxes On Time

working father with two kids
Paul Bradbury—Getty Images Too busy to finish up your taxes in the next week? No worries.

The April 15 tax-filing deadline is here. If you're not going to be done by Wednesday night, relax. You have options.

Tax Day is upon us. If you haven’t pulled your documents together or made real progress on your tax return yet, filing for an extension by April 15 sounds like a pretty good idea. That’s what about 12 million people do each year, according to the IRS.

Getting more time isn’t as simple as it sounds. Here are seven things you should know if you can’t make the deadline.

1. You still have to act by April 15. Anyone can file for an automatic extension, but the paperwork is still due on April 15. Filling out Form 4868 will give you another six months to finish, though you can file your taxes any time before October 15. You can file for an extension for free through IRS Free File. Check with your state to see if you need to file a separate application for an extension.

2. If you owe money, you have to pay up. Just because you’re getting an extension, you don’t get more time to pay your taxes. You’ll need to fill out enough of your tax return to come up with a rough estimate of what you owe. Use a tax estimator like the one the IRS provides. Fail to pay, and you’ll be hit with a penalty of 0.5% to 1% of what you owe for each month or part of a month your bill is outstanding.

3. Failing to file is worse than failing to pay. If you simply ignore tax day and don’t file or apply for an extension—and you owe taxes—you’ll be hit with a failure-to-file penalty, which is usually 5% of the unpaid taxes for each month or part of a month your return is late, up to 25% of your bill.

4. Your bank may be kinder than Uncle Sam. You may want to pay your taxes with a credit card if you don’t have the cash on hand. The interest and fees you’ll pay with plastic (roughly 2% of your tax bill) may be less than the interest and penalties you’d face on a late tax payment.

5. You may not need an extension. If you’re asking for an extension just because can’t come up with the money (not because you don’t have your paperwork in order), you’re better of filing your return and paying what you can. You can request a short extension of 60 to 120 days to pay. You will still pay penalties and interest, but at a lower rate.

The IRS also offers installment agreements when you can’t pay your taxes on time. You’ll have to pay a fee to set up the plan—use Form 9465-FS—and you’ll be billed monthly. The IRS must approve the plan, and you can’t stretch out the payments for more than three years.

6. If you are owed a refund, you won’t be penalized for not filing. Of course, you won’t get your refund until you file your return. So why let Uncle Sam hold on to your money any longer than necessary?

7. If you’re a chronic procrastinator, the IRS won’t issue your refund. If you don’t do your taxes three years running, even if you’re owed a refund, the IRS will keep your money.

Related: Watch for the Obamacare tax scam targeting last-minute filers

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