By Ara Oghoorian
Costs of education and retirement are likely two of your biggest financial concerns. Just in time for tax season, here are answers to a couple of common questions on each important topic.
Q: Are my student loans deductible?
A: Student loans can be a heavy burden on many taxpayers. Luckily, the Internal Revenue Service allows you to deduct a portion of student loan interest, taken as an adjustment to your income.
This means you can claim the deduction even if you do not itemize deductions –– that is, file a Schedule A on your IRS Form 1040 tax return. Unfortunately, the IRS also imposes many limitations on the deductibility of student loan interest. The maximum interest deduction is $2,500 for 2014.
To secure the deduction, you must have used the loan to pay for qualified education expenses, and your modified adjusted gross income (MAGI) for last year cannot exceed $160,000 if you file taxes under the status married filing jointly, or $80,000 if you file using another status. If you’re like most taxpayers, your MAGI is your adjusted gross income as figured on your federal income tax return before you subtract any deduction for student loan interest.
Q: Can I transfer a Direct PLUS loan to my child after graduation?
A: You usually take out a Direct PLUS loan to pay for your child’s college education; your child still completes the Free Application for Federal Student Aid (FAFSA).
The U.S. Department of Education sets the interest rate on Direct PLUS loans; the rate also depends on the date of disbursement. Some parents assume they can transfer the loan to the child once the latter graduates. Unfortunately, no.
Q: How often can I make changes to my 401(k)?
A: Generally, you can change your 401(k) employer-sponsored retirement plan as often as you want. I say “generally” because employers can impose their own restrictions to prevent employees from trading in 401(k) plans.
Our firm strongly advises against actively trading in your 401(k) or trying to time the markets to boost returns. Rather, rebalance your portfolio periodically to minimize risk.
For example, your original blend of assets –– such as stocks, bonds and other holdings –– probably changed after differing returns. Your allocated percentage of different asset classes probably also shifted. To rebalance, you might sell a portion of the asset class that increased above your optimum target.
Review your 401(k) at least quarterly to ensure that the allocations you initially selected don’t deviate from your intended percentages. If they do, rebalance your entire portfolio, including your 401(k), to bring it back in line with your goals.
Q: Is there still time to contribute to my individual retirement account?
A: Despite what the calendar shows, 2014 is not over yet. Whether you have a Roth, traditional or simplified employee pension (SEP) IRA, you can still count a contribution toward your total for last year.
For 2014 and 2015, according to the IRS, your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 ($6,500 if you’re 50 or older) or your taxable compensation for the year if your compensation was less than this limit. If you’re self-employed, your contributions to a SEP-IRA cannot exceed the lesser of 25 percent of your compensation or $52,000 for 2014.
You must contribute funds to an existing or new IRA before the April 15 tax-filing deadline this year.
ABOUT THE WRITER
Ara Oghoorian, CFP, CFA, is the founder and president of ACap Asset Management in Los Angeles.
She writes for AdviceIQ, which delivers quality personal finance articles by both financial advisors and AdviceIQ editors.