The Average Cost of a Divorce

The Average Cost of a Divorce – SmartAsset

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Even the most amicable of divorces generally involve some kind of expense. The average cost of a divorce varies greatly based on how complicated the case is and on the kind of divorce you seek. At the very least you’ll have to pay court costs and filing fees for divorce paperwork. But if lawyers are involved, costs can balloon from a few hundred dollars to several thousand or even tens of thousands of dollars. The cost of getting a divorce can exceed the average cost of a wedding. 

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The Average Cost of a Pro Se Divorce

A pro se litigant is someone who represents himself or herself. While you can do this in a divorce case, legal professionals advise against it. However, in the case of a collaborative, uncontested divorce both parties may work together for a pro se divorce. This could mean using a “divorce kit” and working together to get the divorce filed and granted. In this scenario, the average cost of a pro se divorce could be as low as $300.

Working through the divorce paperwork on your own and filing the papers with the courts yourself (as opposed to hiring a lawyer to help you with both steps) can save you thousands. However, this simplest form of divorce only works in simple cases. If there are children involved or complicated assets to split, cheap and easy is probably not an option.

Related Article: 4 Things to Know About Splitting Up a 401(k) in a Divorce

The Average Cost of Divorce Mediation

Another way to save on the costs of a divorce is to turn to a mediator instead of enlisting the services of lawyers. Particularly if you’re embarking on an uncontested divorce, a mediated divorce can be a much less costly option that a litigated divorce. Again, this option works best when matters are relatively uncomplicated and both parties are willing to cooperate.

You can employ a mediator who works with each party one-on-one and aids in communication between the two parties. Alternatively, both parties can sit down with the mediator and hammer out the details collaboratively. Private mediation can be billed using a flat fee or an hourly rate. Mediators generally charge lower hourly rates than lawyers, but the cost can still add up if the process drags on. The hourly rate for private divorce mediators is generally between $100 and $200.

Even if a divorce goes to trial the judge may order both parties to go to mediation. Court-ordered mediation is free to both parties and is non-binding. However, if you retain the services of a lawyer in a contested divorce and are then ordered to go to mediation, you will still run up legal bills for the work your attorney does to advise you and monitor the mediation process. Your lawyer will also bill you for the time spent revising the settlement reached in mediation.

Related Article: 5 Ways Getting Married Affects Your Tax Bill

The Average Cost of a Contested Divorce

A contested, litigated divorce is the most expensive route. Costs can go as high as $50,000, or higher if wealthy parties and expensive lawyers are involved. Typically, divorce lawyers will charge an hourly rate of $250, but this can vary based on the firm and the city (rates are higher in expensive cities).

Parties in a divorce can decide whether they want full representation, or if they want a more limited service such as an initial consultation or an attorney review of a settlement reached in mediation. The average cost of a litigated divorce is around $15,000. Attorney fees (which are generally not tax-deductible) aren’t the only costs. You may need to hire an accountant to assess the assets that are being divided, or hire an appraiser to value the family home. Counseling for both parties (and any children involved) may also be necessary. There are court fees to pay as well.

Many divorces settle, curtailing the costly trial process. Naturally, cases that settle out of court tend to carry a lower average price tag than divorces with a protracted trial. Regardless, you’ll have some up-front costs. Clients pay a retainer when they first find a lawyer to help them through the divorce process.

Bottom Line

For many who divorce, the process carries high emotional and financial costs. The emotional stakes and the amount of money on the line – both in assets and attorney fees – are good reasons to seek skilled help, whether from a mediator or a lawyer. Do your research before committing to either.

Photo credit: ©iStock.com/Jelena Popic, ©iStock.com/BernardaSv, ©iStock.com/svengine

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia’s work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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Black Friday Shopping During Coronavirus: Tips for Success

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Many people choose to do their shopping on Black Friday to get great deals for the holiday season. It’s one of the biggest shopping days of the year, and consumers make Black Friday purchases both in-store and online. According to research compiled by Adobe Analytics, shoppers spent $7.4 billion on online purchases alone on Black Friday in 2019.

But many people might be wondering if Black Friday will happen in 2020. Read on to find out how COVID-19 might affect this holiday shopping day.

Black Friday Shopping Is Not Canceled: Great Deals Will Be Available Online

You might be wondering if Black Friday will be happening as usual this year. Though it’s not canceled, expect some changes to your typical Black Friday shopping experience.

Because of the COVID-19 pandemic, consumers’ shopping and spending habits are changing. For 2020, it’s recommended that consumers take advantage of online Black Friday deals to avoid visiting crowded stores for safety and health reasons.

The CDC recently issued guidance for Thanksgiving-related holidays. It notes that shopping in-person around the holidays is a higher-risk activity. But don’t worry–it’s pretty likely that your favorite stores are making online accommodations for Black Friday shoppers.

Yahoo! Finance notes that the more traditional Black Friday shopping experience won’t likely happen in 2020. Consumers can expect online sales to begin weeks before Black Friday to be more spread out over time.

As Black Friday approaches, you can also start thinking about how to save and spend when planning your Black Friday shopping. This year, Black Friday weekend will happen on November 27 and will be followed by Cyber Monday on November 30. You’ll be able to take advantage of a number of Black Friday deals both days.

Tips for Smart Black Friday Spending

Even if money is tight because of coronavirus budget cuts and layoffs, you probably still hope to do some shopping during the holidays. Planning carefully can help you save even more money and keep your holiday spending within your means, even during the excitement of Black Friday. Follow some of the following tips for smart Black Friday shopping.

Set a Budget

Having a budget in place helps ensure you spend only what you can afford. Look at your finances and savings to determine how much you can afford to spend on Black Friday deals.

Not sure where to begin? These budgeting tips can help you set and stick to a realistic budget.

Make a Shopping List

When you don’t work from a list when shopping, it can be easy to make mistakes and forget to buy what you need. Take some time to outline a list of your must-have Black Friday shopping items.

Don’t forget to include gifts for the holidays and essentials you’ve wanted to buy, such as kitchen appliances and electronics. That way, you get everything you need and you maximize your spending.

Don’t Stray From Your List

You made a shopping list for a reason. Be sure to stick to it while you shop. It’s also a smart idea to tally up the purchase amounts of your list to make sure the total fits your budget. Refer to your list while you shop.

Compare Sales

Some retailers might offer better deals on products than others, so do your research before Black Friday. This makes it easier to shop at the stores with the best deals and maximize your Black Friday savings. Check your favorite stores to see what Black Friday discounts they’re offering. You can even view Black Friday sales for major retailers on their websites or on sites such as Slickdeals and TechRadar.

If you plan to do your shopping online because of COVID-19, don’t forget to take a look at each retailer’s shipping costs. Ensure the total purchase price, including taxes and shipping costs, fits within your budget.

Use Your Rewards Card Responsibly and Strategically

It’s never a good idea to go into debt over shopping habits. This is true during Black Friday shopping too. When using credit cards to shop, use them responsibly. Don’t spend more than you can afford, and stay within your credit limit.

You might also want to use your credit cards strategically. Choosing to use the right credit cards when buying can help you rack up more rewards points and miles or earn more cash back. Be sure to take a look at the cards in your wallet well before Black Friday, and check each card’s terms and policies before you shop.

Look Into Store Credit Card Options

Another option is to take out a store credit card. Many retailers offer this option, sometimes with a special 0% interest promotion. That means you can make credit purchases on Black Friday without paying interest on them as long as you pay off the total within the introductory period.

Montgomery Ward Credit Card

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  • Buy Now, Pay Later on 1000s of items with Wards Credit
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Review Your Purchases Before You Check Out

Before you check out, it’s smart to review your purchases. Ensure you know exactly how much you’re spending and that you’re staying within your budget. This can help you avoid last-minute and unnecessary purchases. Remember not to ignore shipping costs when you’re buying online.

Pay Off Your Credit Card Statements in Full

Carrying a balance results in interest charges if you don’t have a 0% APR offer. Credit card interest can be very costly, especially over long periods of time. It can also add up, making it easy for you to find yourself in a difficult financial situation.

Instead, consider paying your credit card statements in full every month. After you do your Black Friday shopping, pay off the cards you use. This helps keep your finances on track and set you up for continued success. If you struggle with carrying a credit card balance, other tips can help you use your credit cards more responsibly.

Be Smart When Shopping Black Friday Deals

If you’re ready to get some major deals this Black Friday, get ready to do a ton of online shopping. Following the above tips can help you reduce overspending risks and save money on Black Friday shopping. Familiarize yourself with your current financial situation and credit score before making purchases.

You can monitor your credit scores and keep track of your credit history by using Credit.com’s free Credit Report Card tool. If COVID-19 has affected your finances, there are financial resources available. If you plan to apply for a new rewards credit card, Credit.com can help you choose the right one.


Sign up now.

Source: credit.com

17 Surprising Things You Can Sell for Extra Money

Online shopping young start small business in a cardboard box at work. The seller prepares the delivery box for the customer, online sales, or ecommerce
Tong_stocker / Shutterstock.com

Most of us will never find a treasure like the sweater once owned by legendary football coach Vince Lombardi that a Knoxville, Tennessee, couple bought at Goodwill for 58 cents and resold for $43,000.

But, chin up. There’s still plenty of profit to made in the humble objects that surround us every day — even for things people might call garbage.

After three decades of thrift shopping, dumpster diving and reselling, I’ve found and sold some true oddities. Here are 20 surprising things you can sell for extra cash.

1. Dentures

Sotnikov Misha / Shutterstock.com

Yes, you read that right. Last year at a yard sale, my brother bought a set of used false teeth for $1. He promptly flipped them on eBay for $75.

Buyers for this item fall within two categories: collectors of oddities and folks who simply can’t or won’t pay $900-$1,200 for a new set of chompers.

2. Vintage road maps

travel
Jacob Lund / Shutterstock.com

Road maps are popular with crafters and collectors of oil and gas memorabilia. Older maps with bold graphics sell particularly well, as do maps from defunct companies like Conoco and Skelly.

Several months ago, I sold 50 road maps — most from the 1950s to 1970’s — on Facebook Marketplace for $20.

3. Ugly Christmas sweaters

evrymmnt / Shutterstock.com

Mark your calendars. Each year in November, online sales of ugly Christmas sweaters start to spike.

Companies like Tipsy Elves are cashing in on Americans’ love of goofy garb and making new purposely ugly sweaters. But don’t worry, used sweaters sell great, too, and thrift stores are full of them.

In this category, tackier is better. Christmas-themed sweaters bedazzled with sequins, ornaments, ruffles and garland sell at a premium. Every Christmas season, I sell 10 to 15 ugly sweaters on eBay for about $30 apiece.

4. Sea glass

BlueOrange Studio / Shutterstock.com

If you live along a coastline, hit the beach. Surf-tumbled sea glass is a hot commodity among jewelry-makers and craftspeople.

Red, orange, and amber sea glass are particularly prized. Recently on eBay, 11 pieces of red and orange sea glass sold for $170.

5. License plates

Leene / Shutterstock.com

That stack of old metal license plates in your garage is worth money. In a cleaning frenzy last summer, I liquidated 25 plates for $30 on Craigslist.

Buyers use license plates to decorate man caves, create art and build cool birdhouses.

Although there’s a market for all metal plates, serious collectors pay a premium for pieces that are older, in good condition and from non-contiguous states (Alaska and Hawaii).

6. Antique eyeglasses

Older woman in eyeglasses
Diego Cervo / Shutterstock.com

Your great-grandmother’s pair of wire-framed eyeglasses are likely gold-filled, which makes them worth $20-$40. Look for the abbreviation “GF” (gold-filled) preceded by a karat rating.

Gold or not, vintage cat-eye glasses from the 1950s sell well, too. Retro fashionistas will pay $30-$50 for ornate examples.

7. Vintage hotel keychains

By Dragon Images / Shutterstock.com

Readers of a certain age will remember the plastic diamond-shaped hotel keychains (also called key tags or fobs) from the 1960s and ’70s. Today, they’re a kitschy collectible.

Though collectors pay top dollar for keychains from famous destinations such as The Dunes in Las Vegas, don’t discount roadside dives. Expect each keychain to sell for $5 to $15 on eBay or Etsy.

8. Driftwood

Shen Stone / Shutterstock.com

Large pieces of driftwood are used in landscaping, furniture construction, terrarium design and taxidermy projects. Simple forms fetch $10 to $15, while big, more-interesting shapes can bring $30 and up.

A word of caution: Before collecting driftwood on public land, check with local officials. Many areas prohibit the removal of any natural materials.

9. Antique keys

file404 / Shutterstock.com

Usually made of iron or brass, antique keys are in vogue. Designers use these rustic gems to make jewelry, crafters turn them into wind chimes and collectors frame and display them.

Last summer, I sold several antique keys at a yard sale for $3 apiece. Online, buyers will pay $10 to $15 for a single, unique key.

10. Large pine cones

Close-up of pine tree and cones.
Serenko Natalia / Shutterstock.com

Correction mom and dad: Money does grow on trees.

I have five large pines in my yard, and I’ll occasionally gather and sell the largest pine cones that have dropped to the ground.

Decorators use pine cones as textural accent pieces. Holiday enthusiasts use them in making wreaths and decorating tables. Jumbo cones (9 inches or larger) sell for nearly $9 each on Etsy.

11. Discontinued products

Castleski / Shutterstock.com

My favorite moisturizer, Complex 15, was recently discontinued. In a desperate attempt to horde every last drop of the stuff, I turned to eBay. To my dismay, tubes of my $8.99 moisturizer currently sell for nearly $100 each!

The lesson? Some products have a wildly devoted fan base.

Before you toss out anything, check prices online.

12. Old coffee cups

A woman drinks from a coffee mug and types on a laptop computer keyboard while sitting on her living room sofa at home
simona pilolla 2 / Shutterstock.com

Have a cupboard full of coffee cups? Before you declutter, check values.

Certain cups made by Fire-King are hot with collectors. Look especially for pieces made of milk glass (a type of opaque white glass) that feature characters from the Peanuts comic strip. Depending on rarity and condition, some of these cups fetch hundreds of dollars on eBay and Etsy.

Fire-King also manufactured cups made of jadeite, an opaque green glass. Heavier jadeite pieces from Fire-King’s Restaurant Ware line are particularly valuable. A single jadeite mug can sell for $35 to $40.

13. Modern paper currency

Dean Drobot / Shutterstock.com

Yep, your money is worth money. Modern bills featuring fancy serial numbers can sell for more than face value.

Check your wallet for bills with:

  • Solid serial numbers: All digits are the same (44444444)
  • Repeater serial numbers: Digits in the first half of the number repeat in the second half (40014001)
  • Ladder serial numbers: Every digit is one number higher or lower than the last (23456789)
  • Serial numbers that are very low (00000110) or very high (99999979)

At the time of this writing, an Etsy seller was asking $49 for a 2006 one-dollar bill featuring a repeater serial number.

14. Old yearbooks

Duplass / Shutterstock.com

Yearbooks appeal to three audiences:

  • Celebrity memorabilia collectors scour old yearbooks to find famous names and signatures.
  • Graduates of a particular school buy yearbooks to reconnect with their history.
  • Artists of all sorts use yearbooks to source vintage photos and advertisements.

Values vary depending on the year and school. Several months ago, I sold a collection of four not-so-spectacular yearbooks for $18.

Recently, though, a 1953 high school yearbook containing Sandy Koufax’s senior photo sold for $230 on eBay.

15. Rotary phones

evkaz / Shutterstock.com

Though your grandkids probably have no idea how to use it, that rotary phone packed away in the attic is worth money.

Collectors pay a premium for working phones in bold colors like orange, pink, mint green and blue. A dark blue rotary desk phone recently sold for $180 on eBay.

16. Vintage photos and postcards

A box of vintage family photos
Maria Dryfhout / Shutterstock.com

Is there a shoebox full of old snapshots and postcards hiding under your bed? It might be worth a few bucks.

Vintage images are used as home decor accent pieces and incorporated into artwork. Postcard collectors (yes, that’s a thing) pay top dollar for antique cards featuring iconic moments in history, famous ocean liners or Halloween imagery. I noticed that a Halloween postcard from 1911 sold recently on eBay for $189.

17. Typewriter keys

WichitS / Shutterstock.com

Ready to toss that old Smith Corona? Salvage the keys first! Antique manual typewriter keys are repurposed by jewelry-makers, mosaic artists and scrapbookers.

Several months ago, I removed 55 keys from two heavily damaged typewriters from the 1940s. I sold the lot for $35 on Etsy.

What unusual or surprising things have you sold or seen offered for sale? Share in comments below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

Here’s What You Need To Know About Becoming A Cosigner

Are you thinking about becoming a cosigner for someone? Have you ever been asked to cosign on a loan before? 

becoming a cosigner

becoming a cosignerMany people have been asked to cosign loans for family members and even friends. However, many people do not understand the full cosigner meaning, and becoming a cosigner is never something you should do unless you completely understand what it means.

If someone asks you to cosign a loan for them, you might be hesitant to say yes at first. You also might not want to offend the person or make them mad.

Whatever you may be thinking, I want you to fully understand what you are getting yourself into.

Becoming a cosigner can actually turn into a big financial mistake if you do it without really thinking it through.

Okay, now some of you may think that I’m a mean person for saying that, but I’ve heard many stories from people who’ve had their credit wrecked, have been stuck paying a loan for someone else, and even had their relationships ruined.

All of that from cosigning a loan.

Perhaps you have cosigned before and it went fine, or you know a friend of a friend who has done it. Perhaps you think that things won’t go bad for you or that you are hurting the person by not cosigning for them.

But, I want you to be careful before becoming a cosigner. I’m saying this to help you!

No matter how well you think you know someone, mixing money and relationships can change things. What you may have thought was a wonderful friendship or family relationship can turn into a nightmare.

It may seem very innocent – you’re just helping a good friend or relative get a loan. 

Really, if it was that simple, I’d tell everyone to do it. But, becoming a cosigner is a major financial decision that you need to seriously think about before agreeing to.

Before you cosign a mortgage or another type of loan for someone, it is always wise to be 100% positive of what cosigning a loan actually means and how it may affect your relationship with the person getting the loan.

Surprisingly, many people don’t know exactly what happens when they agree to being a cosigner. Many people just think that all you’re doing is helping a person get approved, but that’s not just it.

Sorry to break it to you, but the bank, landlord, etc., does not care if the applicant has a friend with a good credit history. 

There’s more that comes with being a cosigner.

As the cosigner, what’s actually happening is that you are taking on the full responsibility of the debt if the original applicant is unable to pay.

And, that happens more often than you might think.

Related content:

According to a survey I found on CreditCards.com, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay. This is a HUGE percentage of cosigners, so please keep that in mind.

Other statistics I found about becoming a cosigner include:

  • 28% of cosigners saw a drop in their credit score because the person that they cosigned on a loan for paid their loan late or skipped a payment.
  • 26% of cosigners said that cosigning damaged the relationship with the person that they cosigned a loan for.
  • 90% of private student loan borrowers who applied for cosigner release were rejected. So, if you think that you are going to cosign for a loan and then remove yourself from the loan later, that is much more difficult than you probably think. Stat from Consumer Financial Protection Bureau)

So, who is finding cosigners for loans?

According to the survey mentioned above, 45% of cosigners are cosigning for their child or stepchild. And 21% of cosigners are cosigning for a friend.

The rest is a mixture of cosigning for spouses/partners and parents.

Today, I am going to answer common questions about becoming a cosigner for a loan.

What to know about becoming a cosigner.

 

What is a cosigner?

If you’ve been asked to become a cosigner on a loan, you may not know what that fully entails.

A cosigner is someone who agrees to be on a loan with another person so that they are more likely to be approved. 

A cosigner may be needed for different things such as a:

  • Car loan
  • Student loan
  • Mortgage
  • Apartment or other type of rental home

And more.

Here’s an example of when someone may want a cosigner: if your child wants to buy a car but doesn’t have a long enough credit history to be approved for the car loan. Your child may ask you to cosign their loan so the lender takes your credit score and financial information into account. This improves your child’s chances of being approved.

Other reasons you might be asked to be a cosigner is if the borrower doesn’t have a high enough credit score or doesn’t make enough money to pay the loan (that is a red flag right there).

However, as a cosigner, you are agreeing to pay off the debt if the original borrower is unable to pay it in the future. So, even if the original borrower doesn’t pay a penny, the cosigner would have to make all of the payments or risk being sued, having credit report damage, and more.

In that example I gave, the parent would be responsible for the car loan if their child could no longer make their payments. Not only that, if the child for some reason refused to make payments (I’ve heard of situations like this), the parent would be responsible.

Remember, like I stated above, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay. 

And in some circumstances, even if the borrower files bankruptcy, while their other loans might be discharged, the cosigner may still be responsible for paying the cosigned loan.

Related: Everything You Need To Know About How To Build Your Credit Score

 

How does a co signer work?

Here’s what happens when you agree to become a cosigner for a friend or family member. 

You will start by giving your personal information to the bank or lender. This is information like bank statements, tax returns, paycheck stubs, and so on.

You will also have to complete the loan application, and once you agree with all of the loan terms, then you sign it.

But, becoming a cosigner doesn’t mean that you will own or have partial ownership of the vehicle, house, or whatever else you are cosigning for. It does mean that you are taking full financial responsibility and promising to pay the loan yourself if the borrower does not pay.

Becoming a cosigner is nothing to take lightly.

Does cosigning hurt your credit? Is it bad to be a cosigner?

Becoming a cosigner can hurt your credit score and prevent you from future loans in some circumstances.

Here’s why:

  • If the person doesn’t pay the monthly payments on time, then you may be rejected for a loan in the future. Missed payments can damage your credit score and your credit report.
  • As a cosigner, you are increasing your debt-to-income ratio. So, even if your friend/family member pays every single bill on time, a lender will still see this as YOUR debt. Unfortunately, this may prevent them from approving your loan because they will think you have too much debt on your plate.

If you might be buying something soon that will need financing (house, car, etc.), you should think long and hard before you decide to be a cosigner on someone else’s loan.

Can cosigning a loan hurt a relationship?

Unfortunately, many cosigning relationships go sour. 

I have heard many stories where someone cosigned a loan for someone else and then didn’t talk to them for years or even decades because of a falling out of some sort.

I have always been a firm believer that money and relationships do not mix well. 

If you are going to cosign or lend money to someone, then you should consider it a gift because there is a chance that you will never see that money again.

 

Can you remove yourself from a loan as a cosigner?

Remember the statistic above – 90% of private student loan borrowers who applied for cosigner release were rejected. 

There’s not much you can do to remove yourself from a loan that you cosigned on. If the person isn’t making payments, you are stuck with it for the most part.

The loan would have to be refinanced to take yourself off the loan, and there are many horror stories out there where the original borrower refused to refinance because then they wouldn’t be able to force the cosigner to continue to pay the monthly bill.

Plus, there are instances in which refinancing is impossible because of the value decreasing, the economy changing, a person’s financial situation getting worse, and so on. 

So, while the original borrower may be okay with getting you off of the loan and refinancing, it’s still up to the lender whether or not they will refinance the loan.

How do I protect myself as a cosigner?

There is no guarantee that becoming a cosigner is going to work out, but if you’re determined to do it, you will want to know both of these two things for sure:

  1. That you can trust the person you are cosigning for.
  2. That YOU can make the payment.

Many people who are thinking about becoming a cosigner may not think about that last one, but it is just as important as the first one. Being stuck with the loan payment would be awful, but not being able to make the payment could cause you to go into serious debt and destroy your credit.

You may be certain you won’t be stuck making the payment, but you don’t want to be stuck in a bad financial situation.

Should I cosign a loan?

Even though those cosigning horror stories are real cautionary tales, most people don’t believe they would ever happen to them. 

However, don’t you think most (if not all) cosigners felt the same way in the beginning?

It’s up to each person to decide if they will cosign, and you should never feel forced to do it. However, I want you to remember that if you cosign, then you should make sure that you can afford to make the monthly payment.

You never know, one day those payments are being made and everything is going well. The original borrower may be a great person, but then they may lose their job, have an unexpected expense come up, or something else that prevents them from paying their bills.

Then, what if something happens to you and you can’t make those payments either? Unfortunately, being unprepared and not really knowing what you are getting into can turn into a disastrous situation.

Cosigning a loan may not always be bad. However, I believe it’s better to realize what the consequences are before going into something that can negatively impact your life. It’s always better to be prepared!

 

Is it a bad idea to cosign for someone?

Cosigning a loan doesn’t always have to be a bad thing.

However, I want you to remember that there is a chance that you will be on the hook for the loan.

So, if you cosign, whether that be for a car, mortgage, apartment, student loan, or something else, you should make sure that you can afford the payment as well. Because, there is a chance that you may have to pay it one day.

Everyone has a different situation, and ultimately, you have to do what’s right for you. 

What do you think of becoming a cosigner for a mortgage or other type of loan? Would you ever do it?

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Source: makingsenseofcents.com

What Is a Backdoor Roth IRA?

Using a tax-free Roth to save for retirement is a smart move, but the Roth IRA door gets slammed in your face if you make too much money. Laura explains how high earners can still have one using a backdoor Roth IRA strategy.

By

Laura Adams, MBA
January 6, 2021

overcontribute to a tax-advantaged account, especially when you earn too much to qualify for a Roth IRA. I’m interested in how to do a backdoor Roth. What are the rules that apply for transferring funds from a traditional IRA to a Roth?

If you’re a regular Money Girl reader or podcast listener, you’ve heard me discuss the fantastic tax benefits of a Roth IRA. The problem is, as Jana mentioned, the door to a Roth IRA gets slammed in your face if you make too much money.

But sometimes when you can’t get in the front door, the backdoor is wide open! In this episode, I’ll explain a strategy known as the backdoor Roth or Roth conversion. We’ll cover how high earners can have a Roth IRA without breaking the rules.

What is a Roth IRA?

A Roth IRA is a retirement account for individuals that’s never taxed after you make contributions. Instead of getting an upfront tax deduction (like you do with deductible contributions to a traditional IRA), you can withdraw Roth IRA contributions and earnings entirely tax-free as long as you’ve had it for at least five years and reach age 59.5.

You can make IRA contributions as long as you have earned income and no matter your age, although you can’t contribute more to an IRA than you earn. To contribute the maximum for 2021, which is $6,000 or $7,000 for those over age 50, you must make at least that much.

For 2021, single taxpayers must have an adjusted gross income of $125,000 or less to make a full Roth IRA contribution.

But, as I mentioned, not everyone qualifies for a Roth IRA. For 2021, single taxpayers must have an adjusted gross income of $125,000 or less to make a full contribution. And married couples who file joint taxes must earn $198,000 or less. If your income exceeds these annual limits, you can keep an existing Roth IRA, but you can’t make new contributions.

Note that if you have a Roth at work, such as a Roth 401(k) or 403(b), there are no income limits to qualify. Unlike a Roth IRA, you can max out these accounts every year no matter how much you earn.

RELATED: Can Minors and Seniors Have a Roth IRA?

What is a backdoor Roth IRA?

A backdoor Roth isn’t a type of retirement account, it’s a method for high earners to fund a Roth IRA even when they don’t qualify for regular contributions. If your income is below the annual Roth IRA threshold, you don’t need a backdoor Roth because you can make regular “front door” contributions.

In addition to tax-deductible contributions, you can also make nondeductible, taxable contributions to a traditional IRA. Interestingly, the IRS allows you to convert nondeductible IRA contributions to a Roth IRA, which is the “backdoor” concept. It’s a clever and legitimate way to move money into a Roth IRA, even if you earn too much to qualify for one.

A backdoor Roth isn’t a type of retirement account—it’s a method for high earners to fund a Roth IRA even when they don’t qualify for regular contributions.

To create a backdoor Roth IRA, you must make a nondeductible (taxable) contribution to a traditional IRA and file IRS Form 8606, Nondeductible IRAs. Then you roll over those funds into a Roth IRA. You won’t owe taxes, except on any investment growth in the account earned between the time of your traditional IRA contribution and the Roth conversion. If it was a short period, your earnings and resulting tax should be small. Once your funds are in a Roth IRA, the earnings can grow and be withdrawn tax-free in retirement.

As I mentioned, there’s no income limit for traditional IRA contributions. So, converting nondeductible contributions from a traditional IRA to a Roth IRA allows anyone, regardless of income, to fund a Roth IRA.

Problems with doing a backdoor Roth IRA

Though sneaking into a backdoor Roth IRA sounds great, it doesn’t always work as planned.

If you already have pre-tax money in a traditional IRA, tax must be prorated over all your IRAs.

The IRS requires you to lump all your IRAs together when you make a distribution and doesn’t allow you to cherry-pick one account to convert. So, if you already have pre-tax money in a traditional IRA, tax must be prorated over all your IRAs.

For example, let’s say you have $5,000 in a nondeductible IRA that you want to convert into a Roth IRA, and you also have $15,000 in a deductible IRA. Since you have a total of $20,000 in IRAs, the $5,000 nondeductible portion is 25% ($5,000 / $20,000 = 0.25 or 25%) and the taxable portion is 75% ($15,000 / $20,000 = 0.75 or 75%).

You must pay the same ratio of tax on the conversion. In other words, 75% of $5,000, or $3,750, would be subject to tax. It’s up to you to weigh the upfront tax liability against the future benefits of getting tax-free withdrawals from a Roth IRA.

However, if you don’t have any pre-tax IRA funds, you could convert the full $5,000 from a nondeductible IRA into a Roth IRA with no tax due. Yes, this gets complicated. Just remember that if you have a substantial amount of pre-tax funds in a traditional IRA, doing a backdoor Roth IRA doesn’t help you avoid additional tax. Unfortunately, you can’t convert just nondeductible funds and forget about your pre-tax amounts.

Workaround for doing a backdoor Roth IRA

If you really want to do a backdoor Roth IRA, and you have a retirement plan at work, you can use it as a workaround solution. You could remove your pre-tax IRA money from the equation by rolling it over into your 401(k) or 403(b). That would leave you with just nondeductible, after-tax IRA money to convert to a Roth. 

High earners who fund a backdoor Roth IRA still won’t qualify to make new contributions to the account, but the converted funds grow tax-free, which could save a bundle.

This strategy only works if your workplace plan allows incoming IRA rollovers. Plus, make sure you’re happy with the plan’s investment choices and fees because you don’t have as much control over a 401(k) as you do with an IRA. If you’re self-employed, you could set up a solo 401(k) that allows roll-ins and move your pre-tax IRA money into it.  

Remember that high earners who fund a backdoor Roth IRA still won’t qualify to make new contributions to the account. However, the converted funds grow tax-free, which could save a bundle in taxes. Additionally, Roth IRAs don’t have required minimum distributions (RMDs), which means you can keep them indefinitely.

Doing a backdoor Roth can be worthwhile if you can afford to pay a potentially significant tax bill on your converted balance.

Consider that your converted funds count as income for tax purposes, which could move you into a higher tax bracket for that year. Plus, it’s a transaction that you can’t undo if you change your mind later on. So be sure to speak to a tax or financial advisor about the pros and cons of a backdoor Roth before crossing the threshold.