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!
http://www.daseducation.com
nicole@daseducation.com
215-499-3834

Advertisements

Donating Money From Your IRA

Every week Kelley Greene’s Focus on Retirement Segment in the Wall Street Journal is excellent, this week is no exception.  If anyone has any money left their IRA and would like to donate it to a charity…here are some details.

http://online.wsj.com/article/SB122489075823068591.html

Basically what it says is if you are 70 1/2 or older you can donate up to $100,000 from your IRA tax free to a qualified charity.  The same does not hold for a 401(k) or 403(b).

Ladies, Make Sure You Have Enough To Take Care Of Yourself!

Allstate was running an ad awhile back that reminds us of some important facts:

The average woman spends 11 years out of the workforce taking care of family, costing her an average of $659,139 in earnings.

Wow!  Considering that women live longer and make less money anyhow, this is quite scary!

How do they suggest remedying this problem?  The following three suggestions are made:

1)  Make every earning year count in the form of increased participation in 401(k) plans.

2)  Promote Spousal IRAs.

3) Educate: Offer financial seminars for employees and spouses.

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

Dollars & Sense Education – Raising Your Financial IQ!
http://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!

d_s_education_logo.jpg

Dollars & Sense Education – Raising Your Financial IQ!
http://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!

cza1301l.jpg

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!

d_s_education_logo.gif 

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