2018 IRS Federal Income Tax Brackets Example (Married No Kids)

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The Tax Cuts and Jobs Act (TCJA) changed up the personal income tax brackets, exemptions, and deductions. Here is an updated graphical breakdown of a simple scenario for a married filing joint couple with no children in Tax Year 2018. I’ll also try to illustrate the relationship between gross income, taxable income, marginal tax rate, and effective tax rates. See also:

2018 federal income tax rates for married joint filers. Taken from the official IRS tax tables (source):

The following changes also apply for Tax Year 2018:

  • The personal exemption deduction is now gone ($0), from $4,050 in 2017.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.
  • The Child Tax Credit was expanded with higher income phaseout limits and is now worth up to $2,000 per qualifying child.

Let’s say your household combined gross income is $100,000 a year. You are a married couple with no children, and both earn $50,000 gross income. You are both employees that receive W-2 income only (i.e. neither are self-employed). You don’t have any additional income sources like interest, capital gains, rents, etc. You don’t have any deductions like IRA/401k contributions or mortgage interest that will allow you to itemize deductions. We will ignore any state or local income taxes.

Gross income. Let’s start with your annual $100,000 gross household income. There are no personal exemptions. Instead, you get the larger standard deduction which is $24,000 for married joint filers in 2018. Since you don’t have a lot of itemized deductions, you fall back onto the standard deduction.

The first 24,000 of your gross income is not taxable. Without doing anything special at all, your $100,000 in gross income is now only $76,000 in taxable income after personal exemptions and the standard deductions.

The first $19,050 of taxable income is subject to a 10% tax rate. Shave off 10% of $19,050 and put that on your tax bill ($1,905). The remaining $56,950 of taxable income is moved onto the next tax bracket.

The next $58,350 in taxable income is subject to a 12% tax rate. However, we only have $56,950 left. So we shave off 12% of $56,950 ($6,834) and add that to the existing $1,905. The total tax bill is now $8,739.

In this example, this 12% is your marginal tax bracket. If you earned another $1, it would be taxed at this marginal rate of 12%. Even with a six-figure income, a married couple can still land in the 12% marginal tax bracket (pre-tax 401k or IRA contributions would reduce taxable income even more).

(Have kids? See this example for married with children.)

Payroll taxes. These aren’t technically federal income taxes, but you must each pay a Social Security tax (OASDI) of 6.2% and Medicare payroll tax (HI) of 1.45% of your gross income. That’s $3,100 a year for Social Security and $725 a year for Medicare. You both earn $50,000 gross and don’t exceed the income caps. (Your respective employers pay the same amount.)

Overall effective tax rate. You paid $8,739 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 8.7%. You also paid 7.65% in payroll taxes.

For comparison, the same married couple with no kids in 2017 would have paid $11,278 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 11.3%. Payroll taxes would be the same.

2018 IRS Federal Income Tax Brackets Breakdown Example (Single)

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

The Tax Cuts and Jobs Act (TCJA) changed up the personal income tax brackets, exemptions, and deductions. Here is an updated graphical breakdown of a simple scenario for a single filer with no dependents in Tax Year 2018. I’ll try to illustrate the relationship between gross income, taxable income, marginal tax rate, and effective tax rates. See also my previous post 2018 Income Tax Breakdown (Married w/ 1 Child).

2018 federal income tax rates for single filers. Taken from the official IRS tax tables (source):

The following changes also apply for Tax Year 2018:

  • The personal exemption deduction is now gone ($0), from $4,050 in 2017.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.
  • The Child Tax Credit was expanded with higher income phaseout limits and is now worth up to $2,000 per qualifying child.

Let’s say your individual gross income is $60,000 a year. You are single with no dependents, aged 64 and under. You are an employee that receives W-2 income only (i.e. you are not self-employed). You don’t have any additional income sources like interest, capital gains, rents, etc. You don’t have any extra deductions like IRA/401k contributions or mortgage interest. You live in a state with no state income tax. We will ignore any state or local income taxes.

Gross income. Let’s start with your annual $60,000 gross income. There are no personal exemptions anymore. You do get the larger standard deduction which is $12,000 for single filers in 2018. Since you don’t have a lot of itemized deductions, you fall back onto the standard deduction.

The first 12,000 of your gross income is not taxable. Without doing anything special at all, your $60,000 in gross income is now only $48,000 in taxable income after personal exemptions and the standard deductions.

The first $9,525 of taxable income is subject to a 10% tax rate. Shave off 10% of $9,525 and put that on your tax bill ($952.50). The remaining $38,475 of taxable income is moved onto the next tax bracket.

The next $29,175 in taxable income is subject to a 12% tax rate. So we take 12% of $29,175 ($3,501) and add that to the existing $952.50. The tax bill is now $4,453.50. The remaining $9,300 of taxable is moved onto the next tax bracket.

The next $43,800 in taxable income is subject to a 22% tax rate. However, we only have $9,300 left. So we take 22% of $9,300 ($2,046) and add that to the existing $4,454 (let’s round up that dollar). The total tax bill is now $6500.

In this example, this 22% is your marginal tax bracket. If you earned another $1, it would be taxed at this marginal rate of 22%.

Payroll taxes. These aren’t technically federal income taxes, but you must pay a Social Security tax (OASDI) of 6.2% and Medicare payroll tax (HI) of 1.45% of your gross income. That’s $3,720 a year for Social Security and $870 a year for Medicare. (Your employer pays the same amount.)

Overall effective tax rate. You paid $6,500 in federal income taxes on $60,000 of gross income, for an overall effective tax rate of 10.8%. You also paid 7.65% in payroll taxes.

The same single filer in 2017 would have paid $8,139 in federal income taxes on $60,000 of income, for an average or overall effective tax rate of 13.6%.

2018 IRS Federal Income Tax Brackets Breakdown Example (Married w/ 1 Child)

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

The Tax Cuts and Jobs Act (TCJA) changed up the personal income tax brackets, exemptions, and deductions. Here is an updated graphical breakdown of a simple scenario for a married filing joint couple with 1 dependent in Tax Year 2018. I’ll also try to illustrate the relationship between gross income, taxable income, marginal tax rate, and effective tax rates. In future posts, I will also run 2018 examples for single filers and married joint filers without kids.

2018 federal income tax rates for married joint filers. Taken from the official IRS tax tables (source):

The following changes also apply for Tax Year 2018:

  • The personal exemption deduction is now gone ($0), from $4,050 in 2017.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.
  • The Child Tax Credit was expanded with higher income phaseout limits and is now worth up to $2,000 per qualifying child.

Let’s say your household combined gross income is $100,000 a year. You are a married couple with one child 16 or under, and both earn $50,000 gross income. You are both employees that receive W-2 income only (i.e. neither are self-employed). You don’t have any additional income sources like interest, capital gains, rents, etc. You don’t have any deductions like IRA/401k contributions or mortgage interest that will allow you to itemize deductions. We will ignore any state or local income taxes.

Gross income. Let’s start with your annual $100,000 gross household income. There are no personal exemptions for you and your dependents any more. You do get the larger standard deduction which is $24,000 for married filing joint in 2018. Since you don’t have a lot of itemized deductions, you fall back onto the standard deduction.

The first 24,000 of your gross income is not taxable. Without doing anything special at all, your $100,000 in gross income is now only $76,000 in taxable income after personal exemptions and the standard deductions.

The first $19,050 of taxable income is subject to a 10% tax rate. Shave off 10% of $19,050 and put that on your tax bill ($1,905). The remaining $56,950 of taxable income is moved onto the next tax bracket.

The next $58,350 in taxable income is subject to a 12% tax rate. However, we only have $56,950 left. So we shave off 12% of $56,950 ($6,834) and add that to the existing $1,905. The total tax bill is now $8,739.

In this example, this 12% is your marginal tax bracket. If you earned another $1, it would be taxed at this marginal rate of 12%. Even with a six-figure income, a married couple can still land in the 12% marginal tax bracket (pre-tax 401k or IRA contributions would reduce taxable income even more).

Federal Child Tax Credit. As this income doesn’t exceed the phaseout limits and your child is 16 or under, you also get the full $2,000 Child Tax Credit. A tax credit lowers your tax bill dollar-for-dollar as opposed to a deduction that only lowers your taxable income. Thus, your tax bill is reduced from $8,739 to $6,739. (If you had additional children, each one would reduce your tax bill by another $2,000. Note that there is a limit to the refund-ability of the credit if it makes your tax bill negative.)

Payroll taxes. These aren’t technically federal income taxes, but you must each pay a Social Security tax (OASDI) of 6.2% and Medicare payroll tax (HI) of 1.45% of your gross income. That’s $3,100 a year for Social Security and $725 a year for Medicare. You both earn $50,000 gross and don’t exceed the income caps. (Your respective employers pay the same amount.)

Overall effective tax rate. You paid $6,739 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 6.74%. Again, you also paid 7.65% in payroll taxes. Your average tax rate is lower than a couple without kids due to the child tax credit. In this case, having a kid reduced your tax bill by $2,000.

The same married couple with one child in 2017 would have paid $9,340 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 9.34%.

Completed Sample IRS Form 709 Gift Tax Return for 529 Superfunding / Front-Loading

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529Updated for 2018. Let’s say you are fortunate enough to be able to make a large contribution to a 529 college savings plan, perhaps for your children or grandchildren. You read from multiple sources that you are able to contribute up to $75,000 at once for a single person or up to $150,000 as a married couple (2018), all without triggering any gift taxes or affecting your lifetime gift tax exemptions. (From 2013-2017, these numbers were $70k/$140k). What you are doing is “superfunding” or “front-loading” with 5 years of contributions, with no further contributions the next four years.

Those are pretty big numbers, but any contribution above $15,000 will require you to file a gift tax return because that is the annual gift tax exclusion limit for 2018. ($14,000 for 2013-2017.) You’ll need to fill out IRS Form 709 ], “United States Gift (and Generation-Skipping Transfer) Tax Return”. The instructions are quite long and confusing. You ask your accountant and they suggest talking to your estate lawyer. You may wish to avoid paying the $400 an hour or whatever it will cost as the form should be pretty straightforward.

So how do you fill out form 709 for a large but simple 529 contribution? Here are the resources that I found most helpful:

(Note that I have found what I consider minor errors and/or inconsistencies in some of the sample 709 forms above.)

Here’s a redacted version of my completed Form 709. Let me be clear that I am not a tax professional or tax expert. I am some random dude on the internet that did his own research to the best of his abilities and filled out the form accordingly. This is what my form looks like. It could be wrong. You’ll need to make changes to conform to your specific situation. Feel free to offer a correction, but please support your statement.

For my version, I am assuming that you and your spouse contributed the maximum $140,000 together. (I didn’t actually contribute that much.) The 2014 form is shown below, but I just did this for another kid using the 2017 form and I couldn’t find any differences. Note that you’ll need to file two separate gift tax returns, one for you and one for your spouse. Mail them to the IRS in the same envelope, and I like to send them certified mail.

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f709_generic2

f709_generic3

Here is my Form 709, Schedule A, Line B Attachment

Form 709, Schedule A, Line B Attachment

– Donor made a gift to a Qualified State Tuition Program (a 529 plan).

– Total amount contributed $140,000 in 2014.

– Donor elects pursuant to Section 529(c)(2)(b) of the IRS Code of 1982, as amended to treat the gift as having been made equally over a 5-year period.

– The gift was made jointly by the taxpayer and the taxpayer’s spouse on January 1st, 2014 and will be split equally in half.

– Election made for $140,000 over 5 years is equal to $28,000 total per year, or $14,000 per person per year.

– The contribution is for

Juniper Doe
Daughter
1234 Main St
New York, NY 10001

When to file Form 709. When taking the 5-year election, you must fill out the gift tax return (Form 709) by April 15th of the year following the year in which in the contribution was made. So if you make the contribution in 2018, you must file Form 709 by April 15th, 2019. If you make the upfront contribution in the first year and then make no future contribution in the next four years, you do not have to file a gift tax return after the one you did for the first year.

What if you’re late? Well, you should file the Form 709 as soon as possible. If you did not exceed the limits then technically there is no gift tax due, and there is no penalty that I could find for late filing when there is no taxes due. Still, I would file ASAP.

The tax information set forth in this article is general in nature and does not constitute tax advice. The information cannot be used for the purposes of avoiding penalties and taxes. Consult with your tax advisor regarding how aspects of a 529 plan relate to your own specific circumstances.

E-File Federal and State Tax Extension Online For Free (Updated 2018)

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stopwatch2Updated for 2018. This year, the deadline for federal tax filing is Tuesday, April 17th, 2018. If you file for an extension, you can extend the time allowed to file your return by six months to Monday, October 15, 2018. (It does not extend the time to pay any tax due.) There are many legitimate reasons to ask for such an extension, and the extension is granted automatically without needing to provide a specific reason.

Here’s how to e-File a official federal extension with the IRS in minutes for free ( state extensions where available!). I have done a dry run with each option. Advantages of using e-File include:

  • You save the time and postage costs of paper mailings.
  • You can estimate your tax liability using online software and/or calculators.
  • You receive confirmation of receipt via e-mail or text, often within hours.

Option #1: TaxACT

2016extend_taxact0This is how I usually do my extension. Tax prep software TaxACT.com allows you to e-File your Federal and State extension (where applicable) for free through them. You don’t need to actually use them to file your taxes later, although you certainly can.

Directions
First, register for free at TaxACT.com with your e-mail address and pick a password. To go directly to the extension form, click on the “Filing” tab on the top, and then the “File Extension” link right below it (see below). You will then be guided through the Form 4868 in a question-and-answer format. TaxACT will file the form electronically for you (or you can print and snail mail).

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TaxACT also provides a tax liability estimator to help you determine if you need to make a payment with your extension. If you fill out more details in the main software, then the estimate will be improved. If you don’t think you’ll owe any taxes, you can just put down zero as your expected tax liability. If you wish to make a tax payment, you will be able to choose to pay with direct withdrawal from a bank account (account and routing numbers required) or pay with a credit card (IRS fees apply).

Afterward, you can confirm the status of your extension e-file by going to efstatus.taxact.com. They will even send you a confirmation via e-mail or text message. I got my confirmation less than 3 hours after submission.

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Free state tax extensions. As you can see above, TaxACT will now even file out your state tax extension online if possible, otherwise they will provide guidance fill out all the paper form entries for you and all you have to do is print it out and mail it in. Note that you will need to have started a State Tax return with them (even with no personal info added), for the State extension e-file option to be shown.

Option #2: TurboTax

tt2014_logo

TurboTax.com also allows you to file a Federal extension online for free after signing up for a free account. They will not e-File your State extension, although they will provide some guidance for your state-specific needs. sign up for an account at TurboTax.com first and after logging in, look for the big search box on the top right and type in the keyword “extend” to be directed to their extension section.

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It will walk you through the information needed for Form 4868. Again, if you don’t think you’ll owe any taxes, you can just put down zero as your expected tax liability. If you wish to make a tax payment, you will be able to choose to pay with direct withdrawal from a bank account (account and routing numbers required) or pay with a credit card (IRS fees apply).

According to the Turbotax website, you should receive a confirmation email from the IRS within 48 hours of filing the extension.

[Read more…]

TurboTax Absolute Zero ($0 Fed, $0 State w/ E-File For Simple Filers) Ends 3/15

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ttzero2017TurboTax.com has their “Absolute Zero promotion” again this year where simple filers can get Federal + State + Federal eFile + State eFile all for $0. You must qualify for IRS Forms Form 1040A or 1040EZ – that means taxable income of $100,000 or less, no itemized deductions, no business income, no investment sales. You can still claim certain things like educational tax credits, child and dependent care expenses, retirement plan (IRA) contributions, and the earned income credit. You can even receive interest and dividend income.

TurboTax just announced that this promotion ends March 15th. Prices tend to increase across the board as the deadline nears.

The simplest way to see if you qualify is to fill everything out and confirm the price as $0 before you file. You’ll always be presented with the price before being charged. (If you really have a simple situation, this shouldn’t take very long.) Here is their product comparison chart (click to enlarge).

ttchart2018

New Tax Bill: Pay State and Property Taxes By End of 2017

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taxpaidThe new tax bill that takes effect in 2018 raises the standard deduction and caps certain itemized deductions. Therefore, if you will itemize your deduction in 2017, you may want to grab whatever you can this year to get the full value of those deductions. (This assumes you are not subject to AMT.) Here’s a brief summary of your options.

  • State and Local Income Taxes. You can’t prepay 2018 state taxes in 2017. However, you should pay all your 2017 taxes in 2017. Specifically, if you make estimated quarterly tax payments, you should makes your 4th Quarter state/local payment by December 31, 2017 rather than wait until the deadline which is usually close to the federal deadline of January 18, 2018.
  • Property Taxes. You can’t prepay 2018 property taxes in 2017. However, if you have property taxes based on 2017 assessments (partial or whole), you should make those payments by December 31, 2017. Basically, have you received a bill already? Pay it now. Some counties are actually trying to make things easier for you. See these NYT and WaPo articles for details. Things can get complicated if you usually pay via mortgage escrow.
  • Charitable contributions. On a related note, you may want to make your charitable contributions by the end of 2017, as you may not be able to deduct your donations if you will fall under the standard deduction in 2018.

More: IRS Advisory, NY Times, National Law Review

Healthcare Flexible Spending Accounts: Last-Minute FSA Eligible Ideas

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sunsc

Updated. Here’s my annual reminder to get back all the money you put into your Healthcare Flexible Spending Accounts (and other such accounts) before the end of the year. First, here are some possible exceptions:

  • Some plans allow a grace period until March 15th of the following year as opposed to a December 31st deadline to use your 2017 funds, but it may only apply to claims and not late purchases. Check with your employer.
  • Some plans allow participants to carry over up to $500 in unused FSA funds into next year. Check with your employer.

What are FSA-eligible expenses? Here are the large, well-organized lists:

Quick tip. Certain over-the-counter (OTC) items such as cough medicines, pain relievers, acid controllers, and diaper rash ointment require a prescription for reimbursement. In addition to the written prescription for the OTC medicine, you should obtain a detailed receipt that includes the following:

  • Date of service or purchase
  • Name or description of the item
  • Amount of purchase

Last-minute FSA-eligible items. If you didn’t exhaust your funds with insurance copays or deductibles, here are eligible items that you can still buy over-the-counter without a prescription. Examples included are the best-sellers in each category at Amazon.

Finally, only your FSA administrator can provide you with the exact guidelines for reimbursement according to your plan. I learned this the hard way when our FSA administrator switched one year from in-house to Conexis. Wow, Conexis was a pain in the butt. So many hurdles and rejections without good explanations. I had to submit some claims three times before finally getting approved. If you count the time wasted, I probably lost money by participating in the FSA at all. The other employees in the company must have also complained so much that the very next year, FSA reimbursement was again managed in-house.

S-Corporations vs. LLC: Example of Self-Employment Income Tax Savings

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corpsealUpdated. I have been the President and CEO of a profitable US corporation for over 10 years. I’m also all the other executive positions – CIO, CFO, COO – as there is only one employee (me). Here’s a brief overview of why I chose to incorporate my business into an S-corporation. Please don’t take this as tax advice, this is simply an explanation of my own actions.

I chose to an S-Corporation over an LLC for a variety of reasons (some of which I don’t remember anymore), but one of them was – why else? – to save some money. I wrote a wordy post years back – Forming An S-Corporation To Reduce Self-Employment Taxes. Here’s a more concise example from MyCorporation, a website that will complete and file the incorporation documents for a fee*:

In an S-Corporation, only earnings paid to an owner as salary is subject to payroll taxes. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to self-employment tax.

Maria is a sole proprietor bringing in sales of $90,000. After she pays her costs & expenses, her profit is $60,000. As a sole proprietor, she is required to pay self- employment tax of 15.3% on this entire $60K of profit, which equates to $9,180.

Now, let’s assume Maria formed an S-Corporation for her business, and chooses to pay herself $35K for the year in salary, and take the remaining $25K of profit through a distribution. She still earns the same $60K in profit. But, let’s look at the tax situation. Because corporations only pay Social Security & Medicare taxes on salaries, she’s only liable for $5,355, saving over $3,800 in taxes!

scorp_bigger

I must add that the IRS states that the salary has to be “reasonable” based on the compensation of similar work elsewhere, so don’t get crazy with this. You can’t pay yourself $20 and a Diet Coke.

If you have a single-person LLC, the default tax situation is very similar to that of a sole-proprietorship. The income passes through to an individual’s tax return on Schedule C. However, there are other benefits like limited liability protection of personal assets. (You can also choose to have the LLC taxed as an S-Corporation. Confused yet? I would consult a local attorney for more details on this.)

Additional costs of S-Corporations. As an employer, the S-Corporation has to pay unemployment taxes. The exact rate varies from state to state, but the federal minimum is about $450 per year if your annual income is at least $7,000. However, as both the employer and employee, it is difficult for me to “lay myself off” and claim unemployment benefits. You may also be required to provide other benefits as required by your local area, such as short-term disability insurance.

In addition, I have to run payroll for myself. You can deal with all the federal, state, and local employment forms yourself, which I did for a while, but it can get tedious and the penalties for mistakes can be high. You can also hire a professional payroll service, which can run from $30 to $100 a month.

These additional S-Corp costs can quickly add up to over a thousand dollars per year. As a result, if I had a relatively small income, I would have been better off either staying a sole proprietorship or with a single-member LLC (taxed as a sole proprietorship). The S-Corp starts becoming more worthwhile as the annual profits increase.

Additional costs of LLCs. LLCs can also be subject to state-specific fees. For example, the state of California charges an annual minimum franchise tax of $800 to both S-Corps and LLCs.

Bottom line. There are many facets to the S-Corporation vs. LLC discussion. Unfortunately, it can get quite complicated. I’ve just tried to provide an example of potential differences in taxation and payroll expenses.

* I actually used LegalZoom to file my incorporation papers, which is their main competitor. I don’t really remember any big differences between them, but was happy with my Legalzoom experience.

Solo 401k – Best Retirement Plan for Self-Employed Business Owners

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solo401kThe wealth management group Del Monte published a whitepaper on Solo 401k plans, calling it the “financial industry’s best kept secret” and a “powerful and underutilized” retirement plan for self-employed business owners. The 4-page PDF does a good job at summarizing the benefits of a Solo 401k, aka Self-Employed 401k. Perhaps most importantly, the Solo 401k allows the maximum annual tax-sheltered contribution (or ties for the max) for all income levels and ages.

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Here’a a quick benefit comparison against the SEP-IRA and SIMPLE IRA:

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The key difference is the Solo 401k allows an $18,000 salary deferral at any income (i.e. if you make $18k or under, you can put aside all of it) for 2017 and then adds on a profit-sharing component. In addition, Solo 401ks a larger additional “catch-up” contributions at age 50.

I’ve had a Self-Employed 401k through Fidelity for several years, and I have been quite happy with it. The paperwork has been minimal, although you must start filing IRS Form 5500-EZ once your asset exceed $250,000 or face significant penalties. (It’s one page long.) It has been quite flexible – I am able to purchase mutual funds, ETFs, individual stocks, CDs, and individual Treasury and TIPS bonds. There is no annual fee and I’ve only had to pay trade commissions. Fidelity also accepts rollovers from outside IRAs and 401k plans.

Vanguard, Schwab, and TD Ameritrade also offer cheap in-house Solo 401k plans that work well for low-cost DIY investors. There are now several independent providers with “custom” 401k plans which can offer features like 401k loans the ability to invest in alternative asset classes (precious metals, tax liens, real estate, private equity, etc.) at additional cost. Vanguard and TD Ameritrade offer a Roth option; Fidelity and Schwab are only available with “traditional” pre-tax contributions.

Another option to consider is the Solo Defined-Benefit Plan, or “Solo Pension”. The annual maintenance fees are higher and the IRA requirements are significantly more complex, but you can make much larger amounts of tax-deferred contributions (dependent on age and income). The most affordable option appears to be the Schwab Defined-Benefit Plan. If anyone has any experience with this plan, I’d like to hear about it and would be open to a guest post.

Most Underfunded Private Pension Plans in the S&P 500 (Infographic)

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In addition to data on underfunded state pension funds, Bloomberg also has an infographic on private pensions: S&P 500’s Biggest Pension Plans Face $382 Billion Funding Gap. There are at least 20 large corporations that have put aside less than 70% of what they need to pay out their estimated pension obligations. This is even worse than many state governments, which at least have the ability to increase taxes. Here’s the full list along with their specific funding ratios:

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United Airlines was the largest private pension default in US history. I must admit, I don’t really understand the laws behind private pension obligations. In 2002, United Airlines filed for Chapter 11 bankruptcy. In 2005, a federal bankruptcy judge ruled that United Airlines could default their pension obligations and turn the management of pensions over to the Pension Benefit Guaranty Corporation (PBGC). According to this NYT article, the total shortfall was estimated to be $9.8 billion. Even after the PBGC put up $7.3 billion, this still resulted in a significant cut in promised benefits to many retired workers.

Here’s United’s stock price since emerging from bankruptcy in 2006 (via Google Finance):

ual2017

Yet today, I still see United Airlines on this list at 64% funded. I suppose these are Continental Airlines pensions due to their 2010 merger. American Airlines is also on this list at 58% funded (they also tried to dump their pensions back in 2012). I hope these airlines shores up their pension funds while their stock prices are reaching new highs.

The PBGC has never required taxpayer money and is normally funded by insurance premiums, but it could require a bailout if future pension defaults exhaust PBGC funds. I wonder what kind of future return figures are used in these estimates. If they are too optimistic, the situation could be worse than pictured above.

How Badly Underfunded is Your State’s Retirement Pension Fund? (Infographic)

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The state of Illinois narrowly avoided having their S&P credit rating dropped to “Junk” status, but their current rating is already the lowest ever for any state. Their pension promises now total over $200 billion, but they are a bit short… $120 billion short. That’s only 40 cents saved for every $1 owed. Unfortunately, your state might not be doing that much better. Here is a Bloomberg graphic America’s Pension Bomb which shows the funding ratio for every state available:

pensionmap

This reminds me of a car wreck in slow-motion. Politicians get to make financial promises that can last 30-50 years, but they are only interested in being elected for the next 2-4 years. How will it end? Will states accept the pain now to fix things and get back on track? Or will they just keep kicking the can down the road until faced with huge tax hikes or maybe even a federal bailout?

If you are a municipal bond investor, Vanguard says not to worry: Despite Illinois’s financial troubles, muni market looks strong. Well, it’s good to see that Illinois is only about 1% of their national, investment-grade muni bond funds. I’m not worried about a crisis in the next few years either, but I also don’t see any evidence that things are getting better. I was planning to diversify my muni bond holdings anyway as my income drops in early retirement. Perhaps it’s time to speed up that timetable.