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Showing posts from January, 2016

Retirement Accounts 101 (IRAs, 401(k)s, Oh My!)

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Have you ever felt confused about all the terminology and acronyms associated with retirement accounts? This post attempts to break it down in an easy-to-understand manner.

Saving for Retirement outside of Retirement accounts What would happen if we didn't have special retirement accounts, had no pensions, and still wanted to retire? We would simply save or invest in a normal "taxable account". Regular savings accounts and investment accounts are "taxable accounts".  Let's see how these normal accounts are subject to federal income taxes: Taxes on contributions (initially): The money you put in a taxable account has already been subjected to income tax when you earned it. Taxes on earnings (annually): The money you earneach year in a taxable account is also subject to tax. A common example is the interest you earn in your savings account. Yes, it may seem small, but even this income should be reported on your tax return. Another example is divid…

Why is my bonus taxed more than regular income? (Hint: It's Not!)

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If I go back and look at the paycheck in which I received my "bonus" check in 2015, I note that the amount of federal income tax is a much larger percentage of the total bonus than the amount of tax on a normal paycheck.

What's the deal here? Why does the government take more of my bonus than my regular income?
The answer hinges on the fact that the amount of money withheld from your paychecks for taxes is not the same as the amount of tax that you actually owe for the year. The whole point of filing a tax return in the spring is to calculate whether the income tax withheld from all your paychecks is equal to the amount you actually owe for the year (your "tax liability). It's almost never exactly correct, which is why you get a refund (because a bit extra was withheld from each paycheck throughout the year) or a bill (because not enough was withheld).

The bottom line is that bonus income is taxed exactly the same as regular income. It is simply with…