Before you move forward, it’s good to look back.
This is why I want to mark the end of the year by looking at some financial moves in 2014 worth recapping.
▪ We now have a new way to save for retirement. In his State of the Union address at the beginning of 2014, President Obama authorized the Treasury Department to create a starter savings account dubbed, “myRA,” short for My Retirement Account.
There are many people who don’t have access to a workplace retirement account, and this can serve as a great way to get them started in saving for the time they will no longer be working. The account can be set up by direct deposit through an employer, and workers can continue to use the same myRA account even if they move to a new job. There are no start-up costs or fees. Individuals can contribute just a few dollars a month or up to $5,500 per year (or $6,500 per year if 50 or older). You are eligible to participate if you earn an annual income of less than $129,000 (or $191,000 for married couples filing jointly).
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But the account is just that, a starter account. Account holders can build savings for 30 years or until their myRA balance reaches $15,000 – whichever comes first. Contributions are invested in a new United States Treasury security that earns the same variable rate as investments in the government securities fund for federal employees. The average annual return on this fund has been a little more than 3 percent over the last 10 years.
▪ It was close, but Congress extended a tax break for struggling homeowners. This is good news for people who were able to get some mortgage debt forgiven. But the battle isn’t over. The extension was only for 2014.
Often, borrowers trying to get out from under a mortgage can negotiate to have the remaining balance forgiven. But many people are not aware that forgiven debt, including on mortgages, is considered income. In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act, which allowed taxpayers to exempt up to $2 million of forgiven mortgage debt ($1 million if married but filing separately). The tax exemption played an important role as borrowers who were unable to refinance their mortgages ended up offloading them through short sales, in which the lender allows the borrower to accept a price that is less than the amount owed.
The tax exemption could help up to 121,000 homeowners who sold by way of a short sale in 2014 get an average of $88,456 in mortgage debt forgiven per sale, estimates RealtyTrac. For borrowers in the 25 percent tax bracket, that’s a potential tax savings of about $22,000, RealtyTrac said.
▪ This year, under the federal government’s ability-to-repay rule, lenders must make a “reasonable, good-faith determination” that an applicant can afford a mortgage.
The year also brought tougher requirements for companies that service loans. They have to send monthly statements so borrowers can clearly see how their payments are being credited. Servicers must quickly fix mistakes, and they must credit payments the day they get them. They have to send people early notices if they have an adjustable-rate mortgage that will be changing in order to give them time to refinance or get help if they can’t afford a higher payment.
▪ Midway through 2014, new Education Department rules went into effect creating a better system to help borrowers come out of default status on their federal student loans.
Before the new regulations, the rules simply said that borrowers in default had to be offered “reasonable and affordable” payments based on their financial circumstances. The problem was that there was no clear definition of what reasonable and affordable meant. Many borrowers complained that their rehabilitation payments were unreasonable and unaffordable. In some cases, payments were calculated based on a percentage of the outstanding loan balance, typically 1 percent.
Now the rehab formula is based on the one used for the federal Income-Based Repayment program, or IBR. This plan allows borrowers with federal student loans to have their monthly payments set to a reasonable amount based on their income, family size and state of residence. A borrower can come out of default if he or she makes nine voluntary on-time and full monthly payments over 10 consecutive months. The extra month allows a borrower to be late on a payment and still qualify. Unfortunately, the rules apply only to federally guaranteed student loans. And you need to request rehabilitation from your loan holder.
All these financial changes will help a lot of people move forward to a better financial place in 2015.