Best Money Moves for April

by Spencer Tierney on April 1, 2015 | posted in Banking

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As winter melts away and spring begins, April can be the time to renew your financial life. The tax season is nearly over, so you can finally say goodbye to 2014 and focus on just this year’s finances. Here are some ways to reassess your situation and spring into action:

Step up your budgeting

It’s been three months since you made your New Year’s resolutions, so consider updating your money goals. Look at which online or mobile budgeting apps work for you.

While apps may help you budget, “it’s really about how you spend money,” says Dana Twight, a financial advisor and owner of Twight Financial Education in Seattle. She suggests referring to these as “spending plans” rather than “budgets.”

“A lot of personal finance is about trade-offs and where you place the gratification on your spending plan,” she adds. If you spend a lot more than you need to, consider setting up an automatic savings plan.

Reflect on your tax situation

While your tax-filing experience remains fresh, determine how to be better prepared for next year. If you don’t keep track of receipts well, use mobile apps like Shoeboxed or Proximiant to digitize and sort them. This can help cut down on paperwork and avoid misplaced documents.

Also focus on the benefits of filing earlier next year. If you’re owed a refund, you can get it sooner. Alternatively, if you owe taxes, filling out your return in January or February can give you more time to come up with what you have to pay by April 15. Either way, you get to plan more accurately for the first few months of next year.

Apart from the stress of facing a last-minute race to the deadline, there’s another downside to waiting.

“If you’re focused on 2014 until April, then you’re three months behind for your 2015 taxes,” Twight says.

Look at creative debt reduction

After finishing with your taxes, consider using any spare cash you may have — including any refund you may get — to reduce any student loans or credit card balances. This can be tough after forking over money to tax collectors, but remember that you’ll be better off later.

If you’re looking to consolidate debt or reduce what you pay in interest, one option is to find a good balance-transfer credit card. Some cards offer 0% introductory rates for transferred balances, meaning that you avoid paying interest on it for that initial period.

Another alternative to reduce debt may be borrowing from your 401(k) retirement plan at work. According to a study by the Employee Benefit Research Institute, 87% of participants in these plans could potentially borrow, but few do.

If your plan allows loans, you can borrow 50% of your contributions, or up to $50,000, usually for as long as five years, according to Internal Revenue Service rules. Interest rates tend to be low and fixed, which often beats most credit cards.

“Your 401(k) is your own bank, if you think about it,” says Rob Riedl, director of wealth management at Endowment Wealth Management in Appleton, Wisconsin. Since you’re borrowing from your account, the interest goes back into it along with the principal payment.

This strategy can make sense for those with manageable debt, a healthy 401(k) balance and good payment habits. But there can be some risks. If you leave your job, you may have just 90 days to repay the debt. Plus, you’re taking capital from your retirement fund’s investments, albeit temporarily, which will reduce the returns generated by the account.

From reviewing budgeting apps to consolidating debts, make April the month that you lift yourself out of passive money-management strategies. By taking a more active approach, you can get better control of your finances and help ensure a brighter future.

Spencer Tierney is a staff writer covering personal finance for NerdWallet. Follow him on Twitter@SpencerNerd and on Google+.

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Illustration by Dora Pintek.

The 3 Biggest Mistakes People Make At Tax Time

by Zoran Basich on March 25, 2015

It’s an annual tradition: As April 15 draws near, millions of Americans scramble to round up all their receipts and other documents from the previous year to make the federal tax filing deadline.

But that urgency can lead to poor decisions that cost thousands of dollars in the long run, tax specialists say.

NerdWallet surveyed certified public accountants and asked them to list the most common mistakes taxpayers make at tax time, as well as how to avoid them. Here’s what they said:

Mistake No. 1: Not Being Organized

Lugging a shoebox full of receipts into your tax preparer’s office may not be the best way to deal with your return, but at least those harried taxpayers have everything in one place. That’s not the case with many people, CPAs say.

“One of the biggest mistakes we see folks make is simply not being organized,” says New York-based CPA Becky Egan. “People constantly come in for their tax appointment without all their documents, forgetting their charitable contributions, neglecting to let us know they invested in a partnership, or leaving out a 1099 they received.”

Egan advises clients to keep track of their earnings, expenses, accounts and other important information during the tax year itself, instead of leaving everything for the night before their tax appointment.

“It’s impossible to do any tax planning if you’re always in reactive mode, looking behind at the year that’s passed.”

As Brian S. Devers, a CPA in Forest, Virginia, puts it: “January 31, when you receive your W-2, is not the time to do tax planning for the previous year, because that ship has sailed.”

Mistake No. 2: Not Getting Good Advice

Younger people with few financial complications can get by with filing a 1040EZ form, and tax-preparation software has turned millions of Americans into virtual tax experts. But for many people, filing taxes without getting professional help can be a costly mistake.

“The biggest mistake people make is that they prepare their own return or they go to a tax-prep shop that is not staffed with professionals,” says Huntington Beach, California, CPA Mark Prendergast. “While going to a CPA or an enrolled agent may cost more for the services, they are much more aware of tax savings techniques compared to the nationally syndicated tax-prep companies who hire and train part-timers.”

Prendergast says a tax professional can pick up on nuances that can save taxpayers plenty of cash. Knowing how to handle college tuition payments is one example. Qualified tax pros can figure out whether to use the tuition deduction, the American Opportunity Credit or the Lifetime Learning Credit to maximize tax savings.

“Determining which is the best [option] can save hundreds, if not thousands, of dollars,” Prendergast says. “Some apply to some situations but not others. Maybe one dependent child qualifies for one, but another child qualifies for another.”

Another key decision for which good advice is needed is whether to make a Roth IRA contribution or a traditional IRA contribution, he says. “Usually [people] think, ‘I save taxes with a traditional IRA but not with a Roth IRA.’ But in certain circumstances, a Roth IRA contribution will give rise to the Retirement Savings Contribution Credit (Form 8880) and save the person some taxes.”

Mistake No. 3: Not Contributing to an IRA

This issue leads to the third major mistake that CPAs cite.

“The biggest mistake people make at tax time is not contributing to an IRA because they are not eligible for an income tax deduction on the contribution amount,” says San Francisco-based CPA James Dowd. “Every taxpayer under the age of 70½ with earned income is eligible to make an IRA contribution. If the taxpayer has no existing IRA, the mistake is especially costly, and it compounds over time, because they could make an after-tax contribution and immediately convert the IRA to a Roth with no tax consequence.”

For a 30-year-old taxpayer, Dowd says, the cost of this mistake “could easily be worth more than $250,000 over a lifetime.”

Zoran Basich is a staff writer covering personal finance for NerdWallet. Follow him on Twitter@zoranbasich and on Google+.

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