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5 Reasons to Make a Last-Minute IRA Contribution

By U.S. News & World Report

If you have a big income tax bill due in April 2017, there might be a way to reduce it, if you are willing to set some cash aside for retirement. It’s not too late to make an individual retirement account contribution that will decrease your 2016 tax bill or even boost your refund. Here’s why you should save in an IRA before the April 18, 2017 deadline.

[See: How to Reduce Your Tax Bill by Saving for Retirement.]

You can reduce your 2016 tax bill. As you prepare your tax return you can plug in an IRA contribution and see exactly how much your tax bill will decline. For example, a worker in the 25 percent tax bracket who contributes $5,500 to an IRA will pay $1,375 less in federal income tax. Taxes won’t be due on that money until it is withdrawn from the account. You can defer paying income tax on up to $5,500 that you contribute to an IRA, or $6,500 if you are age 50 or older in 2016. Married couples can open an account in each of their names for double the tax break. If you have access to a 401(k) plan at work, the IRA tax deduction is phased out for those with a modified adjusted gross income between $61,000 and $71,000 as an individual and $98,000 to $118,000 for married couples in tax-year 2016. If only one member of the married couple has a 401(k) account, the income limits climb to $184,000 to $194,000 for 2016. However, once you turn age 70 1/2, you won’t be able to claim a tax deduction for new IRA contributions and will instead be required to take money out of the account and pay the resulting tax bill.

You won’t owe annual income tax on the investment gains. You don’t have to pay income tax on the investment growth in your IRA each year. Taxes won’t be due on the retirement savings in an IRA until you withdraw the money from the account. If you drop into a lower tax bracket in retirement, you will pay less tax on your retirement savings and reduce your lifetime tax bill by saving in an IRA. For example, a worker in the 25 percent tax bracket would pay $1,250 for income tax on $5,000 worth of income. However, if he saves that $5,000 in an IRA and then withdraws it in retirement, after he has dropped into the 15 percent tax bracket, he will pay only $750 for income tax on the IRA distribution.

[See: 10 Tips to Boost Your IRA Balance.]

You can use your tax refund to fund an IRA. IRS form 8888 allows you to directly deposit part or all of your tax refund in an IRA. You can file a tax return claiming a tax deduction for an IRA deposit before the money is in the account as long as you make the contribution by April 18, 2017. Take care to specify that you want the contribution to be applied to your 2016 tax return, because IRA providers are allowed to automatically apply the deposit to the calendar year in which it is received unless you indicate otherwise.

You will be less tempted to spend the money on an immediate need. An IRA makes it a little more difficult to spend your nest egg before retirement. If you take a withdrawal before age 59 1/2, there’s typically a 10 percent early withdrawal penalty, and you will have to pay income tax on the distribution. A $1,000 early withdrawal could result in $350 in taxes and penalties for someone in the 25 percent tax bracket. However, there are a variety of exceptions to the early withdrawal penalty that include many serious needs for the money such as large medical bills, health insurance after a layoff, college costs and a first home purchase.

[Read: 5 New 401(k) and IRA Rules for 2017.]

You might qualify for the saver’s credit. If you save in an IRA and you have a 2016 adjusted gross income of less than $30,750 as an individual, $46,125 has a head of household or $61,500 as part of a married couple, you might be eligible for the saver’s credit. The saver’s credit is worth between 10 and 50 percent of your IRA contribution of up to $2,000 for an individual and $4,000 for a couple, with bigger credits going to savers with lower incomes. The saver’s credit can be claimed in addition to the tax deduction for contributing to a retirement account.

Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”

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5 Reasons to Make a Last-Minute IRA Contribution originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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