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Last week, I walked into a hip coffee shop nestled between Ann Taylor Loft and Urban Outfitters. Located in a family-friendly Chicago neighborhood on a cheerful, bustling street, the cafe didn’t appear to be anything other than typical. However, I soon learned that Next Door Cafe was offering a lot more than your run-of-the-mill espresso.

ndcWalking in, I saw a long wooden bar flanked with a case of fancy pastries. The 25-year-old hipster barista casually asked if I wanted to open a tab, assuming that I was going to stay for more than one latte. I took out my laptop and settled into a picnic table on wheels (all the furniture is on wheels so that the layout can change week to week).

The wall behind me showcased paintings by local artists, all of which appeared to be on sale. Other whiteboard-covered walls were everywhere, filled with inspirational quotes and goals for a community winter coat drive. Everything in the store was temporary and configurable; perhaps as a reminder that ndc2we should always be evolving.

A hostess sat near the front door like a hotel concierge. Her job was to greet guests and coordinate walk-in appointments. Wait… appointments? At a coffee shop? You bet — Next Door Cafe is doing something really unique to help Chicagoans with their money.

Two full-time, on-site financial planners hold office hours during the week, as well as a few weekends a month. Appointments are held in pods, or giant cubes outfitted with two couches and a table (also on wheels). In the privacy of a pod, anyone can discuss personal financial goals such as budgeting, understanding car loans, paying off debt, and saving for retirement. Some topics are handled in a single session, while others take multiple visits. Everything is tailored to an individual, and unlike a traditional advising appointment, every session is free. It’s approachable and it’s inclusive.

More than just money

It’s not just for people seeking financial help, either. A woman sitting at my table was sketching in her journal while she waited for the How to Self-Publish a Book lecture to start. She comes to many events because she likes networking with other authors. Do so has shown her new ways to make her business more efficient; “Artists and entrepreneurs like me need help,” she explained.

Several days out of the week, the café holds lectures about money. Aside from that, local volunteers teach about entrepreneurship, social media, and self-development. I heard there has even been a yoga class. The classes are diverse because they are led by local professionals. These volunteers submit their ideas and agree to share their expertise for free.

Those who prefer more personalized attention can schedule appointments online for one-on-one advice. They can cover any topic in which they have a need, including setting up businesses, writing resumes, configuring WordPress, and even life-coaching — just to name a few. The café seems to understand that personal finance is more than just budgeting. Being financially successful encompasses knowledge, business skills, and the ability to manage stress.

People of varying ages and industries come together to learn from one another. For example, the coffee shop is also a pitstop for students. I spoke with a young PhD candidate who has been coming to the cafe several days a week, simply because she enjoys the staff and the atmosphere. She explained, “Most of the time, I just study. But, sometimes I reserve the conference rooms in the back for group meetings and study marathons. It’s really convenient.” Like everything else, the rooms are free and temporary walls can adapt from one large room to two smaller ones.

The café also uses this space to hold group sessions. Here, groups meet regularly to learn and support each other in reaching their individual financial goals, such as debt reduction and combining finances. The store manager told me that attendees often become good friends. They tend to have a lot in common, so they continue to hang out after the classes meet.

The café seems to believe that support is a foundation of success. They embrace the sharing economy and have found a way to create self-sustaining communities that continue outside of the café.

What’s the catch?

By now, you may be wondering how this is all possible. How can everything — except the coffee — be free? Well, Next Door Café is a marketing and research experiment funded by State Farm. In exchange for the space, baristas, and financial coaches, they collect endless insights about future customer needs and have an environment to float concepts and ideas.

While there is only one location and no public plans for expansion, the financial industry should take notice. For mainstream financial education and support, this model is working. Next Door Café is speaking to Millennials in a way that resonates with their values and appeals to their norms. They have made financial wellness approachable, holistic, and community-driven. I suspect that more companies will replicate the fundamentals of this model as a way to develop deeper relationships with their customers.

What do you think about the Next Door Cafe? If you’re in the Chicago area, have you visited yet?

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At the end of the year, most people in the United States are thinking about the holidays and the potential credit card bills for gifts and family visits. One good way to control this potentially stressful month is to take some time to breathe and get your own finances in order. There are several actions you should consider and complete before the year ends in order to start next year on the best foot possible.

A few weeks ago, the IRS announced that the 2017 individual contribution limit toward a 401(k) retirement account will remain unchanged from 2016. Anyone financially comfortable enough to maximize the contribution will be able to tuck away $18,000 this upcoming year (the same as they could this past year). Savers aged 50 or older qualify for an extra $6,000, in addition to the $18,000, for a total contribution limit of $24,000.

If you plan to maximize your contribution, and did so this past year, you don’t need to make any changes. However, if you didn’t reach the contribution limit this year but plan to do so in 2017, take some time now to plan.

Contact your benefits department via phone or website and change your deductions for the upcoming year. The changes could take a few weeks to go into effect. If you want the increased contributions to take effect at the beginning of the year, it’s best to start looking at the details now.

Calculate Based on Employer Match

In many cases, employers offer some sort of matching contribution. For example, the company might match half of your contributions, up to the first 6% of your salary that you contribute. Or, perhaps they’ll match all of your contributions up to the first 3% of your salary.

Let’s take the first case. In order to maximize your tax benefit and matching benefit, you’ll need to deduct 6% of your paycheck every period, if 6% of your annual salary adds up to $17,000 or less ($22,500 or less if you’re 50+ years old). In the second case, you’ll only need to deduct 3% of each paycheck. If the optimal percentage would result in exceeding the government-mandated maximum, you’d have to determine the best percentage that prevents you from exceeding that threshold.

Special Provisions

I found out recently that some employers offer a benefit, sometimes called something like “spillover protection.” Let’s say you contribute more than the IRS maximum. Companies that offer this feature will allow you to continue deferring income to your 401(k); it would just be considered after-tax contributions. Most other employers would just automatically stop your contribution once you hit the limit. So why is this a nice benefit to have? Well, for those whose deferments automatically stop, and whose employer matches contributions on a per-paycheck basis, they’ll miss out on some matching contributions. Essentially, they’re giving up free money. With this spillover protection, their employer will continue contributing their match (the free money) up to the limit, versus leaving it on the table.

Employers may also have other contribution limits. It’s common for a corporation to say that the maximum contribution percentage is 50% of an annual salary. Be sure to check into your benefits and plan out the year’s contributions accordingly.

Not Maxing Out Contributions This Year?

Recalculating the 401(k) contribution at the end of the year is not a tactic just for those earning enough to maximize the tax benefit. Let’s say you received a raise or cost of living increase this year and haven’t adjusted your 401(k) deferment to match the extra cash flow. The end of the year is a good time to bump your contribution by one or two percentage points. Some 401(k) plans have options where the investor can initiate automatic investment increases each year. This is a good opportunity to turn this feature on or manually adjust your contribution.

This advice also isn’t just for people working for large corporations. Non-profit organizations often offer similar benefits called 403(b) plans, and if you’re self-employed, you may save for your retirement using an individual (or Solo) 401(k) plan.

Don’t wait. The process of changing your contribution can take a few weeks to take effect, so if you want to contribute a consistent percentage of your income throughout the new year, the sooner you make the change, the easier that will be.

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With the holidays approaching, many companies are preparing their bonus checks. However, some employees who are looking forward to their bonuses are also concerned about tax consequences.

I gave up this “extra” part of my corporate pay, in exchange for the benefit of working for myself, when I left my day job a few years ago. An annual bonus was certainly an appreciated part of my income, however. However, if this year’s holiday season is anything like years past, I know I can expect people around me to complain that they’d rather not receive a bonus. But why?

There is a widely-held belief that the extra income from a bonus — which is not really extra, just a variable aspect of compensation — supposedly bumps them into a higher tax bracket. This, they believe, is bad. They believe that they could potentially owe the government a higher tax rate on all of their income. This is incorrect and represents confusion about how marginal tax rates work.

These misconceptions and the resulting complaints are intensified when the bonus check arrives. Typically, they’ll see a net payment amount representing only a fraction of the gross income listed on their pay stub. This only fuels the anti-bonus fire.

What a Bonus Actually Does to Taxes

For most taxpayers, the IRS treats bonus income the same as regular income. All taxable W-2 income gets added together in one box when you file your federal tax return forms. The same tax rates apply to each dollar shown, whether it came from your 9-to-5, your side hustle, weekend babysitting, or a holiday bonus.

There is a catch, though, and is the reason this confusion runs rampant. While the IRS doesn’t discriminate between regular pay and bonus pay, employers often do.

How Employers Calculate Taxes

Employers can choose between two primary methods of withholding federal taxes from bonus or supplemental income. This applies when said “extra” income is given to the employee in a check or direct deposit separate from regular income.

Option 1: The employer may withhold a flat 25% for federal income taxes from the bonus payment. If the employee receives over $1 million in bonus payments in one year, the employer can withhold 25% of the first $1 million in addition to 35% from the amount over $1 million.

Option 2: The employer may add the bonus payment to the most recent regular income payment. They would then determine the standard withholding based on tax tables and the sum of the two payments. Then, subtract the amount already withheld from the most recent regular income payment, and withhold the rest from the bonus.

*Option 3: The employer may base withholding on the sum of the bonus and regular pay using the standard withholding tables. *This option is for employers who choose to combine bonus compensation with regular compensation in one payment, check or direct deposit, without any differentiation between the two types of income.

Regardless of the method the employer chooses, bonus income and regular income are grouped together when you file your taxes. The IRS will refund any overpayment and will collect any underpayment.

Outliers

One interesting exception to the rule of bonuses being taxed the same as all other income applies to hedge fund and other investment managers. This type of income is known as carried interest. Investment managers often take their bonuses from investment gains, and these can be taxed at the long-term capital gains rate of 15%. This rate is usually significantly lower than their marginal tax rates.

My Final Advice

Don’t be afraid of earning that bonus or more money in general. Your employer might withhold more of the check for taxes than you’re used to, but it will even out when you file your taxes.

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If you plan to retire early, you may be wondering whether it makes sense to invest in traditional retirement accounts, such as employer-sponsored 401(k)s/403(b)s and IRAs/Roth IRAs. The speculation comes into play because there’s an early withdrawal penalty when you take money out of these accounts before age 59 ½.

I argue that it’s still a good idea to invest in traditional retirement accounts if you plan to retire early. This is because there are tax benefits that come with these retirement plans. Money contributed to employer sponsored 401(k)s/403(b)s are pre-tax and reduce your taxable income for the year. Money contributed to Roth IRAs isn’t pre-tax but the money grows tax-free.

The best scenario is to have enough money outside of these retirement accounts so that you can live off other investments before age 59 ½ and then tap into your retirement accounts after turning 59 ½. Here are a few tips to aid you in your early retirement planning.

Avoid Early Withdrawal Penalties

Generally, the money withdrawn from a retirement plan before the age of 59 ½ is considered “early” or “premature.” When this happens, you must pay an additional 10% early withdrawal tax. For most, that 10% penalty is a big deal. It will likely result in enough money lost that you’ll want to avoid making early withdrawals.

One thing you can do to avoid early withdrawal penalties from retirement plans is to have other investments. We’ll get to that in a moment.

Another way to avoid early withdrawal penalties is via the IRS rule 72(t). This rule permits penalty-free withdrawals from an individual retirement account (IRA), provided that you take “substantially equal periodic payments (SEPPs)” for at least five years or until you reach 59 ½, whichever period of time is longer. The payment amount will depend on your life expectancy as calculated by IRS-approved methods.

The withdrawals will still be taxed at your normal income tax rate. You can roll over a portion of your 401(k) into an IRA to take advantage of this rule as well. A good guide for IRA conversion can be found here on Dough Roller.

The IRS rule 72(t) is a bit complicated. You may want to work with a financial advisor to make sure you are complying by the rule’s stipulations. If you stop payments too early, you’ll have to pay the early withdrawal penalty on the previously withdrawn amounts.

It’s good to know there’s a way to access your retirement plan funds without the early withdrawal penalty. But, that doesn’t have to be the only option if you plan to retire early. Another option is to have other investments that you can liquidate before you turn 59 ½.

Plan on Other Investments

The best thing you can do is not touch your retirement plan funds until you reach age 59 ½. It’s best to have other investments that you can use as income until you reach IRS retirement age. This means you’ll have to do even more saving during your early years. But it’s worth it for the sake of early retirement.

Here are some options for where to save the rest of your money:

  • Savings accounts and certificates of deposit (CDs) – These accounts offer lower interest rates but guaranteed returns. Your money is also FDIC insured up to at least $250,000.
  • Peer to peer lending – Companies like LendingClub and Prosper let you build an investment portfolio of personal loans. This gives you monthly cash flow.
  • Rental properties – This investment takes some time and skill. But it also offers monthly cash flow as long as you have tenants.
  • Dividend stocks – You’ll gain money in two ways. First, you’ll earn as the value of the stocks appreciate. Second, you’ll gain money from distributions paid out to shareholders by the dividend-paying companies.

You can use these investments to fund your lifestyle until you reach IRS retirement age. Depending on the age you plan to retire, you may not even need that much to sustain you until you reach 59 ½. It’s all about planning ahead of time.

Consider Phased Retirement

Most people work a long career and then jump right into retirement and stop working altogether. If you plan to retire early, though, that doesn’t necessarily have to be the path for you. Consider phased retirement as an alternative, in order to make early retirement work for you.

For example, if you work an office job now and want to retire at age 40, you can leave that day job and then start another career. You could start an online business that doesn’t require you to go into an office. Use the time between when you leave your first career and when you reach age 59 ½ to explore another one of your interests. Have you always wanted to write books? Do you have a passion for working with animals? The possibilities are endless.

Finding a new career to embark on during the first few years of early retirement will not only give you extra money to live on, but it’ll also keep you mobile and energized. Make sure it’s something you enjoy so you can still consider yourself “retired.”

Final Thoughts

Yes, you should invest in traditional retirement accounts if you plan to retire early. They have many tax benefits that make them good investments. What you want to avoid is early withdrawal penalties. You can avoid this by taking advantage of the IRS rule 72(t) as explained above. Or, you could have other investments that fund your lifestyle until you reach age 59 ½ and can withdraw money from your retirement plans penalty-free.

Another consideration to keep in mind is phased retirement. Although you retire from your day job at an early age, that doesn’t mean you don’t have to work at all. Consider starting a new career based on another one of your interests or passions. This way, you’ll keep some money coming in until you reach age 59 ½ — and can withdraw from the traditional accounts — but you’ll still enjoy your early retirement.

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Can You Earn More With a Fidelity CD Ladder?

by Mark Hull

It’s been a long time since banks offered savings accounts with decent returns. The Fed may raise interest this year, meaning rates could finally rise. In the meantime, what do you do? If you’re looking for a quick way to create an investment vehicle that is FDIC insured, and promises greater returns than online savings, […]

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A Penny Saved is $1,000 Earned

by Stephanie Colestock

Are you the type of person who picks up coins on the street? Even pennies? Well, I’d encourage you to step up the habit — and the rest of you may want to take up this hobby, at least for the next few weeks. Ally Bank has a fun scavenger hunt promotion going on right […]

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Amazon Prime: Is It Worth the Cost?

by Charles Aquino
amazon

In 2006, I was receiving about five deliveries a week from online shopping orders. What can I say? I was an online shopaholic. Amazon Prime was only a year old at the time, and I became tired of hoarding filler items in order to qualify for the $25 free shipping minimum. To me, receiving free […]

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Trump’s Childcare Plan: How the DCSA Will Affect You

by Stephanie Colestock

Whether you’re taking care of multiple children, a disabled spouse, or elderly parents, you’ve likely experienced the high cost of dependent care firsthand. With expenses from babysitters to after school programs, it can be difficult to stay ahead of all your other financial obligations while spending on dependent care. To help make dependent care more […]

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11 Ways to Start Preparing for the Holiday Shopping Pinch

by Abby Hayes
holiday-pinch

Does your New Year usually start with a resolution to pay off all that debt you racked up during the holiday shopping season? If so, you’re certainly not alone. Holiday retail sales increased 3 percent in 2015, and many consumers carried that extra spending into the new year in the form of new debt. The key […]

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Today’s Best Bank Deals, Promotions, and Bonuses

by Stephanie Colestock
bank-deals

When opening a bank account, there are a few things you should be looking for: low (or no) fees, the highest interest rates possible, and promotional bonus offers. With the latter, you can often score free money without doing anything extra, which is a win in my book. After all, promotional bonus cash is better […]

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