Higher Minimum Wage Help or Hurt?

Finance Gourmet on May 21, 2015

Now, Los Angeles becomes the biggest city to pass a $15 per hour minimum wage law. Note the very big difference between having a law, and having an actual $15 minimum wage, which it does not, and will not until 2020.

Almost exactly one year ago, I wrote about how raising the minimum wage doesn’t really end up hurting businesses or the economy, in large part because minimum wage jobs are already, well… minimum. The idea is that minimum wage jobs pay the minimum, are done by the minimum number of people, and cannot be outsourced to somewhere where you could pay less than the minimum. The only possible downside, then, is a mass closing of minimum wage businesses. This was because Seattle had just become the biggest city to have a $15 minimum wage law.

Various publications and “news” organizations are already trying to claim to see whatever effect their side predicted is happening. The irony is that anyone saying they know, or can already see what the effects of a higher minimum wage are, is probably lying, or misconstruing their data.

What Happens With $15 Minimum Wage

Here comes hard fact number 1. There is no $15 minimum wage yet. In Seattle, the minimum wage in April went to $11 per hour. That’ right, $11. Not $15.

Here comes hard fact number 2. It takes a long time for adjustments to actually effect the economy. The Federal Reserve assumes that when it changes interest rates, the most dramatic possible direct change to the economy, that it takes six to twelve months for the effects to trickle through the economy. There is no way of knowing, after 30 days, what, if anything, the higher minimum wage is doing in Seattle.

The $15 minimum wage gets phased in over several years. It turns out that even higher minimum wage supporters understand that you can’t just drop a huge increase into the middle of an already running economy. Instead, the wage increases in phases, in part to give businesses (and workers) time to adjust.

The only place with an actual, in full effect, minimum wage of $15 per hour right now is SeaTac, the community around the Seattle-Tacoma Airport. The catch is that thanks to rules, and a lawsuit, only a small portion of the employees there are actually affected, around 1,500 or so. None of the businesses around the airport have gone under, and in fact, many of the businesses that predicted doom and gloom, are actually expanding. The city manager says that there has been no change in sales taxes or property taxes meaning that mostly things are unchanged.

The trick to drawing conclusions here is that 1,500 people is a micro economic case, at best. The economy of the surrounding area, and the United States is doing a little bit better, and that would far offset the implications of such a small number of workers.

The first real, non-partisan, non-specific example of one restaurant, comes in about four months, when businesses start reporting data (for tax purposes, not for minimum wage studies) to the State of Washington. Then, we’ll see if there are more or less businesses, employees, and so on. Of course, the 3 month change could be due to anything, so it’s not like that data will be definitive. And, even then, that data will be for a $11 minimum wage, not a $15 minimum.

We won’t find out about a $15 minimum next year either. The minimum wage in Seattle goes to $13 in 2016. Finally, in 2017, the minimum wage actually hits $15.

Will is succeed or fail? The irony is that the answer likely depends a lot more on how the economy is doing than the actual minimum wage. If things are down, expect the minimum wage to get a lot of the blame. If things are doing well, expect people to say, see the minimum wage didn’t hurt anything.

In the meantime, there are a lot of places that have different numbers in between. Here in Colorado, the minimum wage is indexed to inflation. That means there are no planned increases coming, but the minimum wage increased to $8.23 from $8.00 in 2014.

Of course, the Good Times Burgers restaurant on Colfax in downtown Denver is advertising a starting pay of $9.25 per hour. So, there is no telling how many Coloradoans are actually getting minimum wage right now.

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Finance Gourmet on May 20, 2015

When filing income taxes, taxpayers can choose to either itemize tax deductions, or take the standard tax deduction amount. The IRS adjusts how much the standard deduction is each year based upon inflation. The 2015 standard tax deduction amount is slightly increased over the 2014 standard deduction.

2015 Standard Tax Deduction Amount

As usual, there are different deduction values depending upon how you file your income taxes.

  • Filing Single: The 2015 standard Deduction is $6,300 compared to $6,200 in 2014.
  • Married Filing JointlyStandard deduction for married filing joint is $12,600, up from $12,400 in 2014.
  • Head of Household: The head of household standard deduction in 2015 is $9,250, up from $9,100.

If taxpayers use the standard deduction when filing taxes, the personal exemption is included in the standard tax deduction amount. However, when itemizing tax deductions the personal exemption amount is important.

taxes on patreonFor 2015, the personal exemption amount is $4,000, which is up a bit from last year’s $3,950. However, taxpayers with incomes above $258,250 (filing single), or $309,900 (married filing jointly) are subject to phase-out of the personal exemption.

Itemize or Use Standard Tax Deduction

To decide whether to itemize deductions, or take the standard deduction, taxpayers should add up their potential itemized tax deductions, and add the personal exemption amount. If that total amount is greater than the applicable standard tax deduction, then itemizing will result in lower taxes.

For most taxpayers whose income comes mainly from salary or other employment, rather than investment income, trust income, or other income, the main determinate of whether itemizing or taking the standard deduction is best is how much mortgage interest is deductible. Typically, without deductible mortgage interest of at least $3,000 or more, the average taxpayer will not have enough deductions to making itemizing better than taking the standard deduction.

All reputable tax software, calculates whether it is better for a tax payer to itemize or not. If doing taxes by hand, then, find the big deductions first, and see if they provide anywhere near the standard deduction number. Itemized deductions are reported to the IRS on Schedule A of the Form 1040.

Other large deductions include medical expenses, but only if they exceed 9 percent of your income, and property taxes.

irs schedule a itemized deductions

Deductions Without Itemizing

Many tax deductions are available without itemizing. To see a complete list, check lines 23 through 35 on IRS Form 1040. On lines 49 through 53 are various tax credits that are available whether the standard deduction or itemized deductions are used.

Common tax deductions without itemizing include: educator expenses, health savings account deduction, moving expenses, IRA deductions, student loan interest, and tuition and fees.

Common tax credits offered with, or without itemizing, include the child tax credit and education credits.

Standard Deduction with Small Business

It is still possible to take the standard deduction if you own a small business. Many small businesses files a Schedule C to report income and expenses related to the business. A Schedule C can be filed with, or without a Schedule A for itemized deductions. The results of the Schedule C are reported on Line 12 of the 1040 Form, not within Schedule A. Various businesses can have large deductions (and income) including the home office deduction.

Other Tax Information

Here is how to get an IRS tax transcript and information on what happens if you don’t file your taxes on time.



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Finance Gourmet on May 15, 2015

Not all tax numbers stay the same over time. Many income limits and other tax numbers are adjusted each year, either for inflation, or by another statutory mandate. These tax numbers include the tax tables and tax brackets for each year, for example. The IRS announces the numbers each fall.

This year is a bit confusing because some of the retirement plan tax numbers were increased by cost of living adjustments. However, other numbers remain unchanged from the previous year because the amount of the change was below the amount legally required to change the figures.

2015 IRA Contribution Limits

irs tax numbers graphicThe 2015 IRA contribution limits were recently published by the IRS. Note that these limits are for contributions made during the 2015 tax year, for use when filing income taxes due by April 2015. If you are looking for older information, you can check the 2014 IRA contribution limits.

The maximum IRA contribution for 2015 is $5,500. This is the same as the maximum deduction for 2014. The 2015 IRA catch-up contribution amount remains unchanged at $1,000 as well. Only taxpayers over age 50 are permitted to make a catch-up contribution to an IRA account.

Therefore, taxpayers under age 50 may contribute up to $5,500 to their IRA during the 2015 tax year and those over age 50 may contribute up to $6,500. Remember, however, that IRA contributions may be made through April 15th of the following year. In other words, contributions made anytime between January 1, 2015 and April 15, 2016 may be claimed on the 2015 income taxes. This is provided, of course that none of the amount contributed between January and April 15th, was deducted on your 2014 taxes.

Maximum Income for Deductible IRA Contributions 2015

Traditional IRA contributions are tax deductible for taxpayers with incomes below certain thresholds. These income limits are also adjusted each year for inflation. If you, or your spouse, are covered by an eligible retirement plan at work, then for 2015, the maximum adjusted gross income (AGI) for a full IRA contribution deduction is $98,000 for joint filers, and $61,000 for single filers. Taxpayers with high incomes above these amounts will have to calculate the phase-out for their 2015 IRA contributions. Those with incomes higher than $118,000 for married filing jointly, or $71,000 for those filing single, cannot deduct any part of their contribution to a traditional IRA account.

Taxpayers who do not have an eligible retirement plan offered at work, and whose spouse is also not covered by a work retirement plan may take a full deduction for IRA contributions regardless of how much money they earn.

If a taxpayer is not covered by a retirement plan at work, but their spouse IS COVERED, then the income limit for a fully deductible contribution is $183,000 or less. Deductible IRA contributions are phased out in such cases for incomes between $183,000 and $193,000 during 2015.

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Finance Gourmet on May 12, 2015

As a former financial planner in Denver, I get involved in a lot of interesting personal finance discussions. Recently, a writing colleague was remarking on the difference between getting money one time, and having a new stream of money. In particular, he noticed that while the latter should be better, the former is actually the more fun of the two.

Psychology of Money

One of the interesting things about money is that it is so concrete a mathematical concept, and yet, so nebulous as an actual artifact in our lives. On the first hand, money is easily understood as an exact match of mathematical numbers. For any decision, a spreadsheet-type answer is easily obtained. Higher interest rates are better for savings, worse for borrowing. Saving more is better than spending more, and so on. However, the reality is that the higher interest rate from an online bank that is less convenient and useful might not actually be better. And, is having an extra $5,000 in the bank really better than having spent a week seeing the great museums in Italy?

extra money

Which brings us to the freelance writer‘s incongruous concept of steady income versus unreliable, extra income.

Most people have a steady income. Even freelancers often have a stable, or “usual,” component of income. Human beings naturally adjust to this amount of income over time. So, for example, if our friend typically earns $5,000 per month, then his lifestyle will inevitably adjust to this amount of income.

This is what makes automatic savings like 401k plans, or IRA plans, so important. When the money is not there to get used to, the lifestyle does not adjust to use that money. Many people use this same concept by having extra money withheld from their paychecks by the IRS in the form of over-withholding for income taxes by claiming too few things on their W4 Form. Even though they know this is an interest free loan to the government, it also means that their lifestyle does not expand to take up that part of the income that they never see becomes it comes directly from their paycheck.

For people with variable income, like freelancers, the same thing occurs when new clients come on board.

If our freelancer above gets a new client that brings in an extra $300 per month, then, eventually, his spending and savings habits will encompass that additional $300 until it isn’t actually “additional” any more at all, but just part of normal. This happens even if the money is responsibly earmarked as additional savings.

If, on the other hand, our freelancer gets a client that only has sporadic work offering $300 during some months, that money cannot be counted upon. So, the lifestyle never adjusts. That means every time that extra $300 shows up, it really is extra. It’s a guilt free way to have an extra night out, or to buy a nice gift for a spouse, or whatever. But, in the former case, doing the same thing with that same $300 is not using an extra windfall playfully, but instead taking away $300 that should be going to savings. That’s a very different mentality.

In the end, the steady stream of income is indeed better, but psychologically, a little variability will generally allow for a less rigid, and more fun, few of money, even if the amounts are the same.


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Finance Gourmet on May 11, 2015

There is an article on the CNN website with the headline that T. Boone Pickens thinks Tesla cars are too expensive. The article really isn’t about that, and T. Boone (man, I really hope people call him T. Boone) only says that he thinks the next thing Elon Musk should do is make them cheaper, so that isn’t really the most on point of headlines, but it probably draws in more clicks.

tesla too expensive pricing

Tesla Pricing

There are a couple of things about the article that are interesting. First, and foremost, T. Boone is an oil school oil man. Frankly, he’s probably the old schoolest of all oil men. He’s rich because of what he, himself, did in oil, not as a money guy or CEO, or anything else. He found it, drilled it and sold it.

You would think the old school oil guy would have some sort of cheap shot about electric cars then. That isn’t true. He just thinks they are a little pricey. Otherwise, I think he knows they are the future, just not right now.

The thing about the pricing of Teslas is that they are luxury, sport automobiles. They are that on purpose. You see, before Tesla, electric cars were considered slow, plastic, wimpy cars for tree huggers. Everyone else turned their noses up at them. Musk knew that in order to really break into the American car market, you had to kill the notion that electric cars were only for environmentalists making a statement on its head. There is no way to make your car more serious in America than making it fast, and luxurious.

Enter the Tesla Model S. The Model S has acceleration and top speed numbers to rival any sports car, and the features are in line with sporty version of BMW, Mercedes, or Lexus. In other words, this isn’t a car for poor liberals who think oil is bad, this is a car for suit wearing power players who think gas is beneath them. There is a very big difference.

If you compare the price of a Tesla to those cars, it isn’t expensive at all. While you are at it, you also get a tax incentive, and you don’t have to pay for gas, or oil changes, or …

Of course, it helps that a higher end car has more room to hide the cost of things like the batteries the car needs. In addition, these cars aren’t made out of parts shipped from China. The cars are tweaked and updated such that they really can’t afford to have thousands of them sitting around waiting to be sold. The high price keeps demand down where Tesla can actually meet it.

Now, Tesla is building a new factory to make its batteries, dubbed the Gigafactory. It is also selling some of that battery technology to home owners with its new wall-mounted battery called the Powerwall.

The truth is that oil has always been dirty and messy, but it was so darn cheap that no one bothered to come up with anything better. Now, with Musk paving the way, the gas-powered engine is entering its last decades. Soon, the oil people buying gas will be doing to for the novelty of running a classic car. By then, Musk probably still won’t be selling tons of cars to the mass market. After all, he wants to push the technology forward at the edge, not cater to the everyone market.

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Finance Gourmet on May 3, 2015

The 529 plan is a tax-advantaged college savings plan. Of course, like all plans that offer IRS sanctioned tax savings, there are rules and regulations regarding just how and when a 529 plan may be used. One of these limitations involves how much money you can contribute to a 529 plan in 2015.

Head over here if you are looking for how a 529 plan works. If you want to know how to open a 529 plan account then head here.

2015 529 Contribution Limits

Unlike IRA plans, where there are new 2015 IRA contribution limits, or other child tax credits, there are no income limits for 529 plans. That means that you can contribute to a 529 plan regardless of whether you are a high-income taxpayer or not.

There are, however, still a few kinds of contribution limitations for 529 savings accounts that you want to be aware of.

The first 529 plan contribution limit comes from the 529 plan rules established by each individual plan. Since 529 plans are administered by each of the 50 states, there can be 50 different plan rules. For each plan, there may be both an annual contribution limit and a lifetime contribution limit. In addition, for states that offer a state income tax deduction for 529 plan contributions, there may be a limitation on how much of each year’s contribution may be deducted.

For example, the State of Colorado has no annual contribution limit, but restricts contributions to a Colorado 529 plan once the account balance hits $350,000. On the other hand, California 529 plans allow contributions until the account balance is $371,000. (Many 529 college savings plan limits are indexed to inflation, or otherwise increase on a regular basis.)

For some taxpayers, the most important 529 plan contribution limitation isn’t actually a 529 plan limit at all. IRS rules state that contributions to a 529 plan are a gift. Therefore, to avoid triggering potential gift tax implications, contributions must be limited to under $14,000 each year, which is the 2015 gift tax limit (unchanged from last year). A married filing joint couple can contribute up to $28,000 per year, which is considered one $14,000 gift from each person.

Special Gift Tax Rule for 529 Plans

There is a special rule for 529 plans regarding gift taxes. Up to five years of gifts can be made in advance to a 529 plan without triggering any estate tax or gift tax implications. In other words, a single person can contribute up to $70,000 in a single year to an individual’s 529 plan. However, such a contribution is considered an advance on future year’s gifts. Therefore, if one contributes the full $70,000 into a 529 plan, then no additional gifts may be made for five years.

Again, a spouse may contribute the full gift amount as well. In this case, a married couple that files jointly could contribute $140,000 in a single year to a 529 plan in 2015 as long as they did not make any additional gifts to that same person for the next five years.


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Finance Gourmet on April 27, 2015

I’m a huge fan of higher dividends. I’m less of a fan of share buybacks, but let’s get there in a minute.

Apple Raises Dividend

apple-stock-logoTheoretically, owning a stock means owning a part, or share, of a company. However, if you really break it down, being a shareholder means virtually nothing anymore. For example, in business classes around the country they will tell you that as a shareholder, one of your rights of ownership is voting for the company’s Board of Directors. That’s technically true, but these days, that means nothing. Only a certain number of seats are up for election at one time. Only the candidates that the company’s current management wants are on the ballot. In other words, even if you owned 51% of a company’s stock, your ability to vote would take years to actually affect the company. Your actual avenue for affecting any sort of change is the courts.

If you don’t get to “own” the company, then what is your stock actually worth? Well, it is an item of limited supply that others believe have value. It’s the same way U.S. currency works, or Bitcoin.

The exception is when a company pays a dividend. Then, you actually own something. Dividends are paid to shareholders according to how many shares they own. While you have no ability to control that dividend, if the company pays it, you get it. That gives your shares actual, intrinsic value.

Apple was long a stock that did not pay any dividends. The idea was that owning something tied to something that makes lots of money was good enough. Eventually, the pressure to do something with all that money grew, and Apple started paying out a dividend and buying back it’s own stock.

Today, Apple raised it’s dividend 11 percent from 47 cents per share to 52 cents per share. That makes Apple a growth stock that you can also earn 1.5% dividend on.

Apple Share Buyback

Like many other companies, Apple continues to increase it’s share buyback program. Share buybacks are the Diet Coke of returning money to investors. There is no commitment to continuing a share repurchase, versus the repercussions of cutting your dividend. Also, share buybacks don’t actually provide any cash to investors. Instead, it indirectly boosts share price by reducing the number of shares on the market, which reduces supply, and increases things like earnings per share, all other things being equal.

What makes this announcement really interesting is the reason Apple started buying back shares and paying a dividend in the first place was that it was accumulating this big pile of cash and not doing anything with it. Ironically, sales and profits for Apple were so good that even though it has been using that money to buy it’s own stock and pay dividends, it’s cash on hand actually grew.

Today’s news shows that Apple still has some room to grow, particularly in China and other markets. For long-term investors in the stock that news, and their new, higher dividend should make them feel pretty good about this particular stock investment.

Disclosure: The FinanceGourmet owns shares of Apple stock, although that may change at any time without any notice. This article, and all articles on Finance Gourmet are for informational or news purposes only. This is not a recommendation to buy or sell stock. This is not an offer to buy or sell securities.


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Finance Gourmet on April 24, 2015

Can you get a real credit score for free? The answer is yes, no, maybe, and well… sort of. If you don’t like that answer, let’s jump right in with some specifics that will make it clear whether or not you can really get real credit scores for free.

Real Free FICO Credit Scores

One of the issues with free credit scores is the idea of what a real, true, or legitimate credit score is. Technically, there is no such thing as a real credit score or true credit score. This isn’t physics. All credit scores are mathematical models of the information on your credit report. This produces a number that lenders can use in a statistical model to determine the approximate default rate of borrowers. In a way, it is similar to the mortality rates life insurers use to price life insurance. It doesn’t matter if it is right or wrong for a single person, as long as the overall pool of insured (or borrowers in this case) behaves as predicted.

free fico credit scoresTheory aside, in the real world the vast majority of lenders use the FICO credit score by Fair Issac when they make lending decisions. Different lenders use different credit reports, and some pull scores based on more than one credit report, but almost all lenders use the FICO score when they decide whether or not to approve that new rewards credit card, a second mortgage, or car loan. They use the same FICO score to determine the interest rate they will offer you. So, when people talk about a real credit score, they mean a FICO credit score.

Unfortunately, it is not that easy. As you can imagine, people treat different kinds of credit differently. People tend to default on credit cards first, then car loans, and lastly mortgages, for example. For that reason, Fair Issac offers more than one credit score. Some are tailored to auto loans, some are tailored to mortgages, and so on. Then, for each type of FICO score, it can be calculated from any of your three different credit reports. So, even if you have an actual credit score from Fair Issac, that doesn’t mean you have the true credit score that your lender is using.

No matter what score your lender uses, FICO doesn’t come free. FICO charges for credit scores. They charge lenders, they charge banks, they charge you, if you use their myFICO service. This isn’t a non-profit think tank.

Fake Free Credit Scores

All of this brings us to the concept of fake credit scores, or as finance snobs like to call them FAKO credit scores.

In fairness, none of these scores is fake, per se. They are calculated in a similar manner to a FICO score. The only thing that makes a FICO score more real is that a lender is more likely to actually be using it. A more nuanced terminology might call these alternative credit scores.

There are several kinds of alternative credit scores. These can come for free, depending on who is using them. For example, one alternative credit score, called the VantageScore is owned and calculated by the three major credit bureaus, so anyone affiliated with them can use those scores for free. This is where CreditKarma gets its free credit scores from, for example. In fact, virtually all of the online free credit score services out there from Credit Sesame to Credit Karma to Quizzle and beyond, use alternative credit scores when they give you a free score online.

Can You Actually Get Free Credit Score?

free credit report websiteWhich brings us to the million dollar question. Can you actually get a real free credit score anywhere?

The answer is yes, you can.

Some banks and credit unions, as well as credit card companies, offer to let you see your credit score for free. A certain Discover Card offers free FICO credit scores on your monthly statements.

If these companies aren’t getting free credit scores, then how can they offer them to you for free when places like Credit Karma don’t use real FICO scores?

The answer in all of these cases is that these companies are already getting your credit reports for their own purposes. They are just passing the information on to you.

Most financial institutions regularly pull credit reports on their customers. Your credit card company, for example, wants to know if your credit score is plunging, or rising, before deciding to send you that mailer offering a great new benefit and higher credit limit. Likewise, your bank or credit union doesn’t want to waste money advertising a new home equity line to people with a 420 credit score. So, every so often, they pull your report. Yes, it costs them money, but they are already making money providing your financial services. An extra credit score pull is just the cost of doing business.

Compare this to the online free credit score companies. They make no money off you unless you buy something through them or click on an ad. That kind of revenue isn’t enough to constantly pay for new FICO credit scores for everyone.

Remember, the point of seeing your credit score isn’t so much to know your exact number, it changes daily. The point is to ensure that it isn’t going up or down in ways that you don’t expect. By following along with your credit score, whether it is from a true FICO score or an alternative credit score, you can tell when that high balance on your Target Red Card is hurting you, or that getting a new Fidelity Card doesn’t have any effect because you chose the debit card. After all, there isn’t really anything you can do to your credit score other than improve it by paying everything on time all the time. Everything else, from how many credit cards you have, to how many people have pulled your credit report recently has a smaller affect than your payment history, and those effects get smaller with time.

Use your credit score reporting, however you get it, to keep an eye on your report, not to obsess over the current number, and you’ll be fine.

Finance Gourmet on April 21, 2015

When it comes to retirement planning, 457 plans are kind of the neglected younger sibling of the better known 401k plans. Both are employer sponsored retirement plans, meaning your employer has to set them up for you, unlike an IRA or Roth IRA which are individual retirement plans. However, a 457 plan is a special retirement savings plan in that it is only allowed for certain organizations, specifically governmental employers and non-profit employers. The non-profit 457 plans are known as non-governmental 457 plans and are less flexible.

For governmental 457 plans, the main advantage is that unlike 401k plans, there is no 10 percent penalty for withdrawing money from a 457 plan prior to age 59 1/2 like there is for a 401k savings plan. However, withdrawals from a 457 plan are taxable, just like withdrawals from a 401k plan are taxable.

Which, brings us to the Roth 457 savings plan.

Roth 457 Retirement Plan

roth 457 retirement planAs you can probably guess from the name, a Roth 457 plan has similar tax-advantages to a Roth IRA, or Roth 401k, namely that withdrawals from the account are tax-free, rather than taxable. In exchange, you do not get the up-front tax savings from your contributions like you do with a traditional IRA or traditional 401k retirement plan.

In order to use a Roth 457 retirement account, your employer must first offer that option. An employer may offer only a regular 457 plan, or may offer both a Roth 457 account and a traditional 457 account. For example, the State of Colorado offers a Roth 457 retirement account plan option via Colorado PERA.

If your employer does offer a Roth 457 plan, then you contribute via salary deferral just like with a standard 401(k) plan. Your deferral may be as a percentage of salary, a fixed amount contribution, or other option, up to the annual maximum 457 contribution allowed by law and your plan. There are no coordination rules with 457 plans versus 401k plan anymore. That means you can make the maximum 401k contribution AND another full maximum annual contribution to your 401k plan, for a total of $36,000 ($18,000 each, with a catch-up contribution allowed for those age 50or older).

Your contributions are after-tax. That means that the amount you contribute still counts as taxable income.

Withdraw from Roth 457 Plan

The main advantage of a 457 plan over a 401k plan is that there is no 10 percent tax penalty on withdrawals made before age 59 1/2. However, in order for a withdrawal from a Roth 457 contribution to be tax-free, the plan participant must be older than 59 1/2. In addition, the first contribution to the Roth 457 plan has to have been made at least five years before the withdrawal.

It is easier to understand with a quick table:

  • All withdrawals from a regular 457 plan are taxable.
  • Early withdrawals from a regular 457 plan are taxable but NOT subject to an additional 10 percent penalty like early withdrawals from a 401k plan are.
  • Early withdrawals from a Roth 457 plan are also not subject to a ten percent penalty. However, early withdrawals ARE subject to ordinary income taxes.
  • Withdrawals from a Roth 457 plan after age 59 1/2 are both tax-free and penalty free.
  • Withdrawals from a Roth 457 plan where the first contribution was made during the last 5 years are taxable regardless of age.

Which is Better Roth 457 or Regular 457 plans?

Determining whether a traditional 457 plan is better than a Roth 457 plan or if a Roth 457 retirement plan is better than a regular 457 retirement plan is kind of a tricky question. The answer, depends upon whether or not you ever take an early withdrawal.

If you end up taking an early withdrawal, then the regular 457 plan is better than the Roth 457 plan.


The traditional 457 plan gives you a tax-savings on every contribution you make. The Roth 457 plan offers no tax-savings or deduction on contributions. However, both plans will make you pay regular income taxes if the withdrawal is early. In other words, for an early withdrawal from a Roth 457 plan, you will pay taxes both on the contributions and on the withdrawals. On an early withdrawal from the traditional plan, you will only pay on the withdrawal, not the contribution.

If you do not take an early withdrawal, then the difference is the same as the difference between a Roth IRA and traditional IRA. Assuming the money invested inside your account grows over several years, you will probably save by not paying taxes on a much larger amount than your contributions. However, you may be in a lower tax bracket during retirement, so you may have reaped a bigger reward by getting tax savings while working. This is especially true for contributions made near retirement.

If you consider your 457 plan to be part of your emergency fund, then do not use the Roth option. If you (more wisely) intend to never withdraw from your 457 plan until you retire, then the Roth options is viable.


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Finance Gourmet on April 12, 2015

If you have a Capital One Rewards card in 2015, that is not a cash back credit card, then chances are you are earning points with each thing you buy.  Capital One No Hassle Miles are earned on numerous Capital One rewards cards. The program follows the basics that all other miles based credit card rewards programs use. For each dollar you spend on the credit card, you earn a certain number of miles or points. Different cards have different earning rates. Some cards earn 1.25 miles per dollar, or 2 miles per dollar for purchases at certain places like gas stations or grocery stores. Miles can be redeemed for free airline tickets, free hotel rooms and other free travel services.

2015 Capital One Rewards Catalog

Capital One saves money by not mailing a printed rewards catalog to every cardholder. Some customers report that they get catalogs because they have a high point balance, while others say that they only get the miles redemption catalogs when they have high credit card usage. Either way, there is no way to order a Capital One Rewards catalog in the mail. You either got one or your didn’t.

Like all rewards programs, the merchandise you can redeem miles for is not offered at a consistent bargain price. The reward “prices” are good for months at a time, so unless the card company is willing to hold inventory of merchandise (expensive), it is necessary to charge an amount of points that results in paying full retail or more for an item. You are much better off redeeming your rewards points and miles for free travel online anyway.

Capital One Rewards Chart

Fortunately, you don’t even need a complicated Capital One rewards chart to figure out how many miles you need to redeem for a free flight, depending upon whether you have Capital One No Hassle Miles, or Capital One Venture Miles.

For the Capital One Venture Card, and its no-fee cousin, the Capital One Venture One Card, you redeem your miles at a rate of 100 miles per dollar for any travel expense. (Only certain categories of travel expenses are allowed under the Venture One rewards program, but they include airfare, hotel and car rental.)

You don’t have to order your reward or redeem miles in advance. Rather, when your travel expenses show up on your credit card statement, you can redeem your miles against the existing charges. For example, if you spent $650 on a free plan ticket as your credit card reward, you would buy the ticket using the Venture card just like you would if you were not redeeming miles for free trips. When you see the $650 show up on your monthly bill, or online, login to to redeem your miles. Use 65,000 miles to cover the $650 charge and your balance is now $650 lower. Just pay the rest of your credit card bill like normal.

If you have a Capital One No Hassle Miles card, the deal may require a free ticket rewards redemption chart.

  • A ticket that costs less than $150.00 takes 15,000 miles to redeem.
  • $150.01 to $350.00 takes 35,000 miles to redeem.
  • $350.01 to $600. 00 takes 60,000 miles to redeem.
  • Tickets over $600.01 are the price times 100 miles to redeem.

Capital One Purchase Eraser

However, most Capital One rewards cards now offer the company’s Purchase Eraser. For cards that earn miles, travel purchases, such as airline tickets can be erased for 100 miles per dollar. A $200 airplane ticket would require 20,000 miles to erase, giving the equivalent of a free airline ticket on any airline. The Purchase Eraser also works on non-travel charges, but it costs more miles, or points, to erase non-travel expenses.

A relatively wide range of charges are considered travel expenses by Capital One and thus subject to the best redemption rate. For example, I’ve noticed Car2Go rental expenses show up as travel, as well as hotel stays, many hotel charges, restaurants that are in hotels (even if you didn’t stay at the hotel) and so on. Just log into your Capital One Rewards redeem website to see which items show up under “travel”.

Redeem Miles for Cash or Gift Cards

You can also redeem No Hassle Miles for cash or gift cards.

Cash rewards are the same cost as statement credits. The only difference is that you don’t get a check in the mail. Each reward is redeemed at a rate of half the redemption points for travel. In other words, while 10,000 miles should get you $100 worth of travel, it only gets you $50 worth of cash, or $50 as a statement credit.

Gift card rewards are dependent upon both the retailer and amount. Some retailer’s gift cards cost the same amount as cash. In that case, you are better off buying the cards, collecting the points for spending the money and then redeeming for a statement credit. Other retailers redeem at the same rate as travel. There are also special deals that come and go for certain cards that come out as a better deal compared to cards. At the time of this writing, a $100 Bed Bath and Beyond Gift Card was 8,000 miles, while a $100 Bass Pro Shops Gift Card was 9,000 miles, and a $100 Lowes Gift Card was a full 10,000 miles.

Watch out for changing redemption rates based upon the size of the card. Some retailers will charge a higher rate on cards with smaller values. Often, the better rate begins at $100 gift cards, so check this price point first, and compare to the lower price amounts.

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