You May See Your 401(k) Contribution Limits Shrrrrrrrrrrrinking

Another great WSJ article by Jilian Mincer, as the recession deepens, employees are limiting their contributions to their 401(k)s which means you too might have to limit yours. WHAT!?!  Yes that is right federal rules require that 401(k) plans not favor highly compensated employees, those earning more than $105,000 in 2008.  Higher wage employees can’t contribute more than 2 percentage points more than their lower paid colleagues.

So beware of changes coming………………

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

Health Insurance When You Aren’t Covered By An Employer or Medicare

Money Magazine had an interesting article this month about a man who is financially ready to retire at 56 but is not sure how he will handle medical coverage until Medicare kicks in at 65.  This article jumped out at me because even as a very healthy, normal weight, self employed, 30 year old, I have had trouble getting coverage.

The article suggests the following:

1) Get in shape. Aim for optimal heath at least a year before you apply for insurance.  This will help you qualify for insurance and better rates. 

2) When you schedule your annual checkup, ask your doctor to review your medical history with you for accuracy.  If you have applied for individual life, health, disability or long-term-care insurance within the past seven years, the industry may already have a file on you.  You can get a copy of it from MIB.com.

3) Shop for individual health insurance months before you leave your job. ehealthinsurance.com is a good place to start as well as nahu.org.

4) Evaluate how your private health insurance option measures up against COBRA.  Through COBRA you can stay on your previous employer’s insurance plan for 18 months, but it isn’t cheap.

5) Ask for an estimate of your premiums and assume these will grow at 10% annually as they have recently.  Add up what you will pay until you turn 65.  This unfortunately may dim many people’s chances at early retirement.

5) If you cannot get individual coverage after COBRA you will be HIPAA-eligible, guaranteeing certain backup coverage.  States make available last resort insurance if you are HIPAA eligible.  Be wary, these plans are very costly.

6) Some states (NJ, NY, VT, MA, ME) mandate guranteed group plans for businesses with even one employee, which may make sense if you plan to do any type of freelance work.  Go to statehealthfacts.org.  Even if you are not in these states you may be able to get insurance through your local chamber of commerce.

Whatever approach you take, please, please, please take this seriously as it is quite difficult to get insurance once you are on your own!  Take it from someone with experience!

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

If I Get A Divorce, Does My Spouse Still Collect My Social Security Benefits?

Recently, a friend of mine who is getting a divorce asked me this very question.  I had just recently read a Wall Street Journal article by Kelly Greene entitled “Social Security Benefits Don’t End With Divorce” and I summarize the findings below.

If your ex spouse: 

1) Did not re-marry

2) Earned less income than you, if any at all

3) Was married to you for at least 10 years

Luckily a divorced spouse can collect a Social Security retirement benefit based on the work record of an ex-husband (or ex-wife), and it won’t affect the latter’s retirement benefit or that of his or her current spouse.

For the divorced spouse to collect the worker must be at least 62 years old and collecting benefits or be eligible for benefits. 

The divorced spouse is also eligible for widow’s benefits after the worker dies.  Your current spouse also can claim Social Security based on your work history, along with widows benefits.  In a situation where the divorced spouse would be collecting survivor benefits, he or she could qualify at early as age 60 – or age 50 if he or she qualifies as having a disability.

If the divorced spouse remarries, he or she typically forfeits the working spouses SS benefit based on the former spouse’s working record.  However, if the spouse remarries after 60 he or she can still collect a widow’s benefit when the former spouse dies.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

When Converting a Traditional IRA to a Roth IRA in 2010 – Beware of the Glitches

Funding a tax-deductible Traditional IRA will garner you an immediate tax break, investments grow tax deferred, but withdrawals are taxed as ordinary income.  A Roth doesn’t offer an immediate tax deduction  but investments grow tax deferred and withdrawals are tax free.  Unfortunately, if you are covered by a retirement plan at work and make more than $116,000 if you are single and $169,000 if you are married filing jointly – you can’t contribute to either.

Non deductible IRAs in the past were a very un-popular investment vehicle.  Contributions are not deductible on your tax returns, they grow tax deferred but are withdrawn at regular income tax rates.  However, in 2006 a new law was passed that said in 2010 individuals who were restricted from contributing to a Roth IRA are allowed to convert their non deductible and deductible Traditional IRAs to Roth IRAs regardless of salary. 

Converting your non deductible to a Roth in 2010 without paying additional taxes is an excellent strategy.  However, be careful not to trigger more tax liability!  Lets say you have $100,000 in a regular Traditional IRA and $25,000 in a non-deductible account.  You would owe taxes on the $21,000 because it would be assumed that the $25,000 was coming pro rata from the whole IRA rather than just the non deductible IRA.  You don’t want to pay taxes twice so what can you do? 

Solution #1: Roll the deductible portion of your Traditional IRA into a 401(k) if allowed.  Then when you go to roll over the non deductible portion into a Roth you will not be double taxed!

Solution #2: Even if you have a large IRA that you don’t want to mingle with non deductible IRA money to be converted, your spouse may not.  If not, your spouse can fund a non deductible IRA until 2010 and then convert it to a Roth.

To Rollover or Not To Rollover…That Is The Question

There are a million and one things to think about when you leave a job for a new one.  New office dynamics, tasks and responsibilities, even new lunch options!  There is one item that comes with leaving an old job that often gets overlooked.  What to do with your previous company retirement account, your 401(k) or 403(b).  You have three options:  rollover your old account into an IRA account, keep your money in your previous employer’s plan or rollover the old account to your new employer’s plan.

What is one to do?  The answer to this question depends on a few things!  I present the pros and cons below. 

Benefits of an IRA Rollover:

Your Old Plan May Be a Bad Deal - It is truly amazing how many bad plans are out there.  Some plans impose atrocious expense rates, wrap charges and other needless costs.

Expand Your Investment Options - Most plans, even the good ones, restrict their participants to a few investment options. Roll your money over into an IRA and you have unlimited options.

Consolidate Your Accounts – By consolidating your old plans into a single IRA you can manage your portfolio in a single account and get complete picture of your investments all in one place. Even more importantly, by rolling out several accounts into one you can sometimes save on expenses.

Avoid the Money Market Trap – In some cases, if your former employer is unable to make contact with you and your previous investment choices in your plan are no longer available, your investments may be placed in some sort of stable principal fund. If you forget to follow up, it may be years before you realize that your hard earned retirement investment is earning 2% a year.

Tracking Your Money – Many plans do not use ticker symbols and are not easily trackable. In many cases this is true for companies whose plans are managed by an insurance company (ING, Hartford etc.) By rolling-over your plan into an IRA you will be able to invest your money in funds for which a public price is posted on a daily basis.

Index Investing – It is amazing that after all this time, most retirement plans offer only minimal index fund investment options.  

Benefits of Leaving Your Money in Your Old Plan:

Tax Benefits If You Hold Company Stock - This is beyond the scope of this article but if you have company stock in your company retirement plan, contact a financial advisor before initiating a rollover. 

Benefits of Rolling Over Into Your New Employer’s Plan:

Ability to Borrow Penalty Free - This is a highly unadvisable strategy but it is a benefit of an employer plan versus an IRA.

Penalty Free Withdrawals at Age 55 - You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA.  To do so, you must terminate your employment no earlier that the year in which you turn age 55.

 

The decision whether or not to rollover funds is not always cut and dry.  Do your research and choose wisely!  And remember, a rollover contribution doesn’t count toward annual IRA contribution limits — you can still make your regular contribution.  Also, don’t forget to keep investing in your current employer’s retirement plan — at least enough to collect the full amount of your current employer’s matching contributions. Your retired self will thank you.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

What To Do When Your Company’s Retirement Plan Stinks

A problem that many Americans face is the choice of whether or not to invest in a less than stellar retirement plan (401K, 403B) at work.  I’m talking about plans filled with lousy mutual funds with high expense ratios and bad returns.  So what do you do when you want to sock your money away for retirement and there are no good investment alternatives in your employer’s plan?

1) Complain to your employee benefits department.  This isn’t always going to help and certainly not fast.  You also risk pissing off the people who hired you.

 2) Consider, “Do I get a company match?”  If the answer is yes, you should at least contribute up to the match.  That is and always will be free money.  Virtually any match on your money will beef up crappy returns significantly.

3) After the match has been reached or without a match the decision becomes much harder.  Most people like the ease of investing in a company retirement plan because the money comes right out of your account.  Many people do not have the discipline to save outside of their retirement accounts for an IRA or after tax investing.  If this is you, use your company’s retirement plan.  A lousy plan is better than nothing. 

If you have the discipline to save outside of your work account than you are probably better off investing your next dollars in a low cost IRA or Roth IRA.  After these are maxed out you really need to run the numbers and see if after tax investing will make more sense than investing in underperforming mutual funds.

Rule 72(t) – Retire Early Penalty Free!!!

Many individuals feel the 401K is less desirable because they want to retire early and don’t want to postpone their investing gratification until they are 59 1/2.  That is the age that you can withdrawal funds from your 401K without a 10% penalty from the government.  If you have enough money in your 401K to retire at age 45, why can’t you?  Well, you can!!!

Rule 72(t) of the tax code the “equally substantial distribution” eliminates the early withdrawal penalty if done properly!

How It Works

1. Quit working.
2. ROLL your 401k into an IRA.
3. Apply for a 72(t) “equally substantial distribution”.
4. The IRS will offer you (3) optional payout amounts. The (3) IRS optional payout methods will tell you how much the “equally substantial distribution” will be based on your age, the age of your beneficiary, the amount of money you have, the % rate used for the calculation and how long they expect you to live (based on IRS’s mortality table).
5. The rule is, once a rollover is completed and a 72(t) is setup to pay out an income stream, it must
   continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever 
   comes last. For example, if you start a 72(t) at the age of 57, it must run until you are age 62, 
   then it stops. If you are age 50, then it runs until you reach age 59 ½, then it stops.
6. After the 72(t) has stopped, then of course you can take out of your IRA any amount you might desire or require.

***I need to point out, just for clarification, that YES all the income you receive is fully “income taxable” at your applicable income tax rate but without any added penalty.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

Retirement Accounts for The Self Employed (Part 5 of 5) – What Is The Best Plan For You?

Independent’s Week is officially over!  I hope all of the self employed people out there enjoyed my detailed blog entries about the differences between all of your options for retirement plans.  In the chart below I summarize your options, key details and the pros and cons of each plan.  Enjoy.

 

For the rest of this series:

http://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

http://daseducation.wordpress.com/2007/10/11/retirement-accounts-for-the-self-employed-part-4-of-5-the-keogh/

 

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

Retirement Accounts for the Self Employed (Part 4 of 5) – The Keogh

Ok folks, another entry for the self starters out there!  Part 4 of how to sock your money away for retirement for the self employed.  Non self employed folks, come back next week and I’ll some good stuff for you!  So let’s do this… Part 4 – The Keogh. 

Keogh plans are the self-employed equivalent of corporate retirement programs.  They come in two basic flavors: profit-sharing plans and defined benefit pension plans. 

Annual contributions to Keogh profit-sharing plans are based on a percentage of self-employment income or compensation and subject to a $45,000 ceiling.  A plan document must be drafted in Year One (this may cost a couple hundred bucks), and the IRS demands an annual report (you can probably do this yourself).

Keogh defined benefit pension plans are designed to deliver a targeted annual retirement benefit, which can be as high as $180,000.  Each year’s contribution must be calculated by an actuary — the exact amount depends on your income, the target benefit, years until retirement and anticipated investment returns.  Annual actuarial fees and the required IRS report can run up to a couple grand.  Another negative: You’re locked into making the actuarially determined contribution each year.  However, if you make good bucks and are over 50, a defined benefit plan may be worth all the trouble — because it permits much bigger contributions than any other type of program.  If you’re younger, go with a SEP, profit-sharing Keogh or Solo 401(k).

To put this entry in perspective, the Keogh plan is quite complicated and probably not appropriate for most self employed folks out there.  Keogh setup and ongoing fees for paperwork and for professional guidance are more suited to self-employed individuals with established businesses and consistent incomes.  One reason behind this limited parameter is that once you open a determined benefit contribution plan, you’re locked into that contribution every year. 

Do I Qualify For A Keogh?

Any sole proprietors, partnerships, LLCs, and anyone with self-employment income.

Are Keogh Contributions Pre or Post Tax?

Keogh plan contributions are deducted from pre tax income and contributions and interest income are tax deferred until withdrawal.

Where Do I Set Up a Keogh?

A Keogh plan is something you REALLY want to talk to a live financial advisor about.

How Much Can I Contribute Annually to a Keogh for myself?

You will encounter the same $45,000 ceiling for contributions to a Keogh profit-sharing plan but you can set a ceiling as high as $180,000 for a defined benefit Keogh plan.

Why Not Just Open a Traditional or Roth IRA?

Do Both!

When Do I Set This Up?

If you are establishing a plan for the first time, complete the Adoption Agreement(s) by December 31 (Simplified Keogh plan) or your fiscal year-end (Standard PSP/MPP plan), and you will be eligible for a deductible contribution for this year.

What If I Already Participate In My (Other) Employers Plan?

I was not able to get a definitive answer about this.

Do I Have to Put Away the Same Amount of Money Every Year?

With a profit-sharing plan you can vary annual contributions from 0 – 25% of compensation per year or skip a year if business conditions change.

With a defined benefit pension plan you make fixed contributions each year (1 - 25% of compensation) as your commitment to retirement benefits but once you select a percentage, you must contribute that same percentage each year, no more and no less. This contribution cannot be changed unless you amend the plan.

What If I Have Employees?

I was not able to get a definitive answer on this one!

Next Stop!

In Part 5 I will sort out what plans make sense for your individual situation!

For the rest of this series:

http://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

Retirement Accounts for the Self Employed (Part 3 of 5) – The Simple IRA

More Retirement Accounts for the Self Employed! Cmon.  I know its dry, I know.  But its like eating vegetables, its goooooooood for you.  He He.  The good news is if you are not self employed, you don’t need to bother reading.  If you are self employed – read on brothers and sisters!  Don’t you want to learn the best way to shelter your income?  If you have employees, don’t you want to help them save for retirement?  So let’s go.  Part 3 – The Simple IRA.  Part 4 of this series will describe the KEOGH and the last entry, Part 5, will discuss what options are appropriate for you according to the kind of business you have and your goals!

Do I Qualify For A Simple IRA?

Employers are eligible to establish and maintain a SIMPLE plan only if the employer:

1. No more than 100 employees (including self-employed individuals) who earned $5,000 or more in compensation during that year; and;

2. No other qualified retirement plan, 403(b), or SEP at the same time.

Pre or Post Tax Contributions?

Simple IRAs are pre-tax contributions. 

Where Do I Set Up a Simple IRA?

The usual: Vanguard, Fidelity, ETrade, TRowe Price, etc.

How Much Can I Contribute Annually to a Simple IRA for myself?

Max contribution: up to $10,500 (2007) as an employee an an employee for a total of $21,000 (2007).  If you are 50 or over, you can contribute a total of $26,000 (2007) of PRE-TAX money.

Why Not Just Open a Traditional or Roth IRA?

Do both if your income makes you eligible for a ROTH IRA or Traditional IRA.

When Do I Set This Up?

Deadline to open an account is Oct 15th of the reported tax year.

What If I Already Participate In My (Other) Employers Plan?

Make sure you stay under the annual limits for total contributed to all employer sponsored plans!  So between your SIMPLE IRA and the other employer’s 401K your own contribution cannot exceed a total of $15,500 for 2007 or $20,500 if you are 50 or over. 

Do I Have to Put Away the Same Amount of Money Every Year?

No.

What If I Have Employees?

The SIMPLE IRA has a mandatory employer contribution requirement. This contribution requirement can generally be made as follows:

1. The employer can make a dollar-for-dollar matching contribution on the first 3% of compensation that the individual elects to defer, or;
2. The employer can make a nonelective contribution of 2% of each employee’s compensation for all eligible employees. You may choose to give the nonelective contributions only to eligible employees who make $5,000 or more in the year.
3. Employees can contribute 100% of their annual compensation up to $10,500 ($13,000 if age 50+) for 2007.

 Anything Else?

There are such a thing as SIMPLE 401Ks but there is no benefit to this plan as you still have the lower SIMPLE limits $10,500 (2007) and more administration.

Next Stop!

In the next installment of this series (Part 4 of 5) I will describe another kind of retirement account for the self-employed – The KEOGH!  In the Part 5 I will sort out what plans make sense for your individual situation!

Other great blog entries and articles on Simple IRAs:

http://www.irs.gov/retirement/article/0,,id=111420,00.html

For the rest of this series:

http://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/